Netflix’s subscription party is over. Are advertisers going to clean up?

Netflix’s subscription party is over. Are advertisers going to clean up?

Netflix's ailing performance has fed ongoing speculation that its ad-free model's days are numbered. What are its next steps?

Netflix has just seen a huge chunk of its share price evaporate as it announced the loss of 200,000 subscribers in Q1 and anticipates the loss of millions more to come.

The media industry – and let’s all face it, we all knew the subscriber-based growth model would plateau eventually – has been quick to highlight that this means ads are on the way. 

With the financial pressures now facing us all, Netflix being the first monthly bill on the chopping block is no great surprise. It just means the business has been forced to accept the need for an ad-funded tier earlier than many would have predicted.

So, what now? Will ads help Netflix return to growth – and do they offer a potential bonanza for advertisers? And, perhaps most importantly, how will Netflix futureproof itself when Apple’s and Amazon’s VOD lossmakers, as well as new streaming entrants, are already eating away at its numbers?

Learn from the smaller players

The "freemium" model is a potential next step. This is the core service for platforms like YouTube, but any Netflix foray into this two-tier approach would have to get the model right if it isn’t going to end up cannibalising its existing audience. Those people receiving ad-supported "lesser" subscriptions might have been full subscribers one day. 

Similarly, advertising-based VOD services are already entering the picture. Platforms such as IMDb TV, or Amazon Freevee as it is now, have been testing a free-to-use model for a while now. ITV is introducing ITVX later in the year. The pure-play AVOD approach is a way for platforms to compete against traditional linear TV as well as the premium streaming services.

Perhaps most importantly, at least for brands like Apple and Amazon, services like Freevee or Prime Video are yet another way to keep eyeballs inside their wider ecosystem. That’s why they can afford to make them loss-leaders.

Netflix may have to find a way to attract people into an ecosystem of its own. It has started laying the groundwork with mobile gaming but may have to embrace other revenue streams such as video podcasts to broaden this beyond the "traditional" Netflix viewing experience.

Ramp up the product placement

One area where Netflix has an edge, though, and certainly over traditional TV, is in possessing the technology to develop the next era of product placement. The long lead times of Netflix shows are a turn-off for most advertisers, but this is where dynamic real-time product insertion might be an answer.

Univision has already started to use this approach in Spanish-language "telenovelas", and Netflix could use the technology to offer brands the chance to place context-relevant ads or other content on computer screens or on background billboards in shows as they happen.

This is already a key element of brand activity in video gaming and sports and we’re at the point now where the technology exists to do it in movies and live-action shows.

What it means for advertisers

Globally we are in the midst of a fragmented market that’s already starting to stretch – Hulu, Peacock, Paramount+ and others have already joined the fray.

VOD has become a question of reaching consumers’ share of time, which is a finite resource. Many traditional advertisers – the ones that were really only interested in linear TV up until now – will have to look again at streaming services as they open up because that is where the younger and more premium audiences are to be found. They have the technology and are screen-agnostic.

The good thing about ad-supported platforms like Freevee is that it might allow brands to dip their toes in the water (or the stream, if you’ll forgive me) to test and experiment on what a future ad-based relationship with Netflix might look like.

There might even be an opportunity for Netflix to differentiate by offering a more transparent approach for advertisers, given the difficulty of getting data from existing platforms. 

But the main thing is that, for VOD services, the reckoning has come. Somewhat ironically, the proliferation of streaming services now mirrors the proliferation of TV channels when satellite and cable first arrived.

Netflix is better placed than many to survive the melee, but only if it can find a model that fits a fast-shifting market. Focusing its attention on people sharing passwords may be a short-term fix, but the longer-term answer will almost certainly have to involve some form of advertising support.

Watch out for Stranger Things’ Eleven switching to Tesco Frozen Waffles and Viscount Bridgerton wielding a Pall Mall mallet sponsored by Nike.

Lawrence Dodds is planning partner at media agency UM


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