Netflix to launch ad-supported plan

In a move that had been predicted for some time and following months of speculation, Netflix recently announced that it would be rolling out an ad tiered model in selected thriving markets.

Why is Netflix introducing an ad-tier?

After experiencing a boom over the course of the pandemic, the Subscription VOD (SVOD) market has become increasingly cluttered, with the recent arrival of Paramount Plus adding to the likes of Amazon Prime Video, Disney Plus, Netflix and Apple TV to name but a few. When you add to that the multiple options for streaming Broadcaster VOD (BVOD) and hundreds of linear TV channels, the UK public has never been so spoilt for choice. With less money in our pockets due to the cost of living crisis, the number of subscription services households pay for is under close scrutiny and we appear to have entered a survival of the fittest situation.

While all SVOD providers continue to invest heavily in content, with Amazon estimated to have spent over £1bn on the production of the upcoming Lord of the Rings prequel and Netflix sparing no costs on its hit shows The Crown and Bridgeton, viewers cutting back on their expenditure are now picking and choosing between which services they are willing to pay for. A dramatic reality check came for Netflix investors earlier in the year when 200,000 subscribers were lost in Q1. While the 1m subscribers lost in Q2 was half the level forecast, shares in Netflix are currently worth almost a third of the start of the year despite significant revenue growth in developing territories and buoyant audiences due to hits such as ‘Stranger Things’ series 4.

Netflix’s concerns around the slowdown in growth were evident early in the year when it was announced it would be exploring restricting the sharing of passwords, a move that was followed by increased prices in April (standard package went from £9.99 to £10.99). This came with full understanding of what it would do to its subscription numbers, and Netflix promptly reduced staff numbers to cut costs. The removal of content from the platform due to licensing issues (typically a result of other networks prioritising their own streaming services) has required further investment in fresh content, and while capable of creating the most talked about shows worldwide such as Squid Game and Better Call Saul, a smaller back catalogue may result in users turning back to local broadcasters for free to view content. Indeed, ITV, Channel 4 and Sky have all reported record high VOD viewing to soften the blow of declining linear impacts.

Along with ad avoidance, maintaining a premium aspect to the service is key to retaining paid for subscriptions, so its unlikely Netflix will move all of its content to the ad-funded model and, as with its paid for service, there will be variances in each market. Netflix is thought to be in talks to amend programme deals with the likes of Warner Bros, Universal and Sony Pictures to allow its content to appear on the ad funded tier, but Netflix produced content is expected to be available on the new service from the start.

What could it mean for advertisers?

With linear reach in decline, the addition of SVOD services to AV plans will be welcomed by advertisers eager to access premium content and reach audiences who have either become disengaged with or grown up without linear TV. The arrival of the advertising-supported plan isn’t expected until early 2023, meaning it will follow shortly after the launch of ITV’s redeveloped free ad supported streaming service ITVX – which will bear many similarities to the Netflix platform. Netflix isn’t the first subscription VOD service to move towards an ad funded model, with Amazon carrying adverts during its premium live sport on Prime and across other AV features of its service. Netflix is the leading player though, and its popularity makes it likely that ad inventory will be plentiful if even 5% change to the ad service.

How will Netflix’s ad-tier work?

Netflix has partnered with Microsoft to launch the subscription plan, in what could eventually lead to an acquisition for Microsoft down the line which would open the door to gamifying Netflix shows through Xbox while possibly bringing Xbox titles to the big screen. In the short term this partnership eradicates the need for Netflix to set up their own ad-sales team and enables them to quickly utilise Microsoft’s recent experiences in the TV / video ad space through Xandr, specialising in monetising programmatic streaming inventory and advanced TV.

This announcement poses a threat to traditional broadcasters already fighting for share of screen time and crucially adspend, but content is king and provided they continue to invest in programmes viewers want to watch there is no reason they shouldn’t continue to compete with the new players to the AV ad market.

Advertising on Netflix through Microsoft will allow for highly targeted campaigns to extend and compliment AV strategies and UM will be keeping a close eye on developments to see how this may be incorporated into client plans.