Netflix with advertising? Streaming service tests promotions for original content

In the last few weeks, Netflix has introduced skippable programme promotions for its Netflix Originals between episodes or ahead of selected content. It is an abrupt change for the service that has positioned itself as a premium, ad-free platform in the past, and many viewers are not sure where the latest development could lead.

While broadcast TV still has a place in the New Zealand viewer’s screen time itinerary, there is no denying we are moving to SVOD platforms in droves. Nielsen’s ‘New Zealand Connected Consumer Report 2018’ showed that 1.2 million New Zealanders have access to a Netflix subscription, equating to approximately 434,000 households across the country.

Not only have SVODs changed the platform we watch our TV shows on, they have also changed our viewing habits. The rise of binge-watching culture has become so fervent that Netflix introduced a ‘Skip Intro’ feature for viewers impatient to get straight to the content.

Having built its reputation on its premium, ad-free alternative to traditional television, some viewers have been left irritated by the introduction of promotional advertising auto-playing on the service.

This month, Netflix confirmed it is testing showing ads for its original content only. At the moment, the ads are also operating on an opt-out basis, with subscribers able to turn off the advertising in their settings.

Alex Lawson

Carat general manager Alex Lawson says that media buyers and marketers should be welcoming the potential for advertising on Netflix.

“With a consistent decline in people-using-TV and the main audience on free-to-air and subscription TV, why wouldn’t we want to chase those departed eyeballs? The level of targeting possibilities with the data they hold is incredibly attractive in our efforts to provide relevant and targeted messaging to consumers.”

As a Netflix subscriber though, Lawson admitted he would hate if the ads started appearing on the paid platform. However, he says there is a large potential audience waiting for a free or reduced-fee Netflix model that contains ads.

Free online television service TVNZ OnDemand has 1.8 million subscribers, despite offering advertising. And Lawson says if Netflix proves advertising on its service can be done successfully then the likes of Neon and Lightbox would have to seriously consider add advertising.

“There is a parallel here to social media where everyone was proudly ad-free, then Facebook introduced ads, it worked and everyone else followed.

“Content is still king. If Netflix has the shows I want, and they introduce ads, there will be a downward blip for sure, but ultimately if the shows remain great and only available on Netflix then we go back or stay.

Many paid-platform users expect their subscription fees to do away with the advertising associated with the free versions, such as on Spotify. Yet, New Zealanders are no strangers to advertising on paid services, with Sky TV playing ads despite its price tag.

In New Zealand, Sky TV adjusted its subscription model in March 2018, breaking its ‘Sky Basic’ service in two and offering customers the option of building bundles on top of a cheaper entry-level package, ‘Sky Starter’. The change was Sky’s initiative to compete more effectively in the increasingly competitive market of online television. Based off the latest annual report, it is possible this change may have aided in reducing churn, however it is too soon to draw solid conclusions.

In the United States, Netflix’s main competitor, Hulu, already offers a tiered model, which includes advertising on the paid-for platform. Hulu boasts 20 million subscribers, which is only one-third of Netflix’s US numbers.

Hulu’s base-plan costs US$7.99 per-month and includes ads, or subscribers can opt for the US$11.99 to have the ads removed. However, while the commercial free option costs more, a small number of shows are not able to be included in the ‘No Commercials’ plan due to streaming rights. These include Grey’s Anatomy, Scandal, and How to Get Away with Murder.

Stuart Rutherford

Zenith managing director Stuart Rutherford says while paid-platform users do get frustrated when a product they are paying for gets interrupted by advertising, people do adapt.

“Players like Sky TV have had such advertising and sponsorship in place for so long, it has become commonplace. However, advertisers need to see beyond the opportunity to simply ‘reach’ those eyeballs lost on linear TV, and judge the quality of the viewer experience.”

While targeting on online advertising is more finely-tuned than anything television can offer as a platform, it is not an exact science. Rutherford says people can be particularly irritated when a targeted ad misses the mark, and brands need to be wary of the potential impact placement in a paid environment has on their reputation.

Rutherford says it is likely that this promotional advertising experiment from Netflix is a way of testing the waters and understanding viewer engagement if a commercial model is introduced in the future. But the reaction for users has surprised him.

“To be honest I’m surprised by the reaction, or overreaction. It’s like going to the movies and getting pissed off at the trailers, I love those. What it is, of course, is a generation who have grown up in control and subsequently think they have some form of ownership and collective influence – and yet arguably they are just really impatient and opinionated.

“The opportunity for Netflix is substantial, and the potential revenue upside could be transformational on a global scale. Addressable advertising on a global scale will only lead to programmatic buyers salivating at the prospect in group hubs south of the equator.”

Even if Netflix lost 10-15 percent of their 130,000,000 strong global audience after introducing a commercial model, the revenue upside would obviously be attractive enough to offset any loss in subscriber numbers, Rutherford says.

If Netflix were to offer a free-model or introduce commercial advertising to its books in the future, Rutherford predicts it could have the same impact that Google and Facebook have had over the last 10 years. The platforms now enjoy close to 30 percent of the total New Zealand market’s ad revenue, which repositioned the traditional media landscape forever.

“Online video spends are only growing ahead of actual streaming numbers, and for a number of advertisers, online video now represents close to 20 percent of their total screen spend.  

“The very thought of a Netflix commercial model should kick start local market players to fast track their streaming service roadmaps.”

Scott Keddie

Omnicom Media Group chief investment officer Scott Keddie says that he would be supportive of an online streaming shake-up if Netflix chooses to adopt the Spotify model, allowing consumers who are wholeheartedly against advertising disruption to opt-out.

“If the advertising options were just limited to the downtime between episodes or new content selections, consumers may tolerate advertising disruption. However the transition would need to be carefully managed. Giving consumers choice would be the best move Netflix could make.

“The evolution of content subscription models firmly need to have the consumer at the heart of change – we as consumers have choice and therefore the power to decide who we engage with. The most powerful move from any content delivery service is to continue to provide compelling content.”

Only time will tell if Netflix will offer a two-tier service, giving users a price-break for opting for advertising. It’s also unclear how long the promotional advertising test will last, before the service no longer becomes opt-out. But with 130 million users in 190 countries, one thing that is for sure is that whatever move Netflix makes, it’s sure to change the wider SVOD industry.

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