An ad-supported Netflix could become a media planners dream

Last weeks’ announcement of Netflix appointment of Microsoft as its advertising sales and technology partner was significant news in the marketing and advertising world. James Davidson, GM of Planning at PHD Media, lays out how this is set to change the industry as we know it.

We often hear and read things in our industry that are pitted to ‘change everything’, but this is one that really will…  well, not change everything but change a lot.

Netflix for years had a strong stance of saying they wouldn’t take ads (even though they do feature a lot of brands), but when news came out earlier this year that amid a drop in subscriber numbers, increased costs and an ambition to move into developing markets such as Latin America, India and Africa who simply aren’t able to pay $15-20 a month, the decision was made to introduce a lower priced subscription tier that would take advertising.

This is something we at PHD have been predicting for years, which, to be honest, it wasn’t the most bold prediction.  Although you might hear a lot about people not liking ads, or only wanting ‘personalised ads’, the reality is that people are more than happy to tolerate ads if they get something for ‘free’ – it’s why FTA TV, radio, newspapers and online news platforms have been profitable businesses for decades. It’s all about the value exchange, and I’m pretty sure people will tolerate watching an ad or two to watch some of the world’s greatest films, TV shows and documentaries if it significantly reduces the subscription cost… in fact, I’m sure a lot of people will choose to do this.

The economics seem reasonably straightforward too, with some analysts estimating Netflix could generate $1.2 billion in US advertising revenue. This will help make up some of the loss in monthly subscription revenue, and potentially help offset (or even fund) additional production costs, which is becoming increasingly important when competing with the likes of Disney and Amazon who have much deeper pockets (and of course inflation).

Economics and consumer viewing preferences aside, this will have huge implications on the media and advertising landscape around the world and here in New Zealand. TV audiences have been in decline for years, particularly amongst younger audiences (who never really watched much TV to start with), which left us with YouTube, Facebook and (to an extent) BVOD (e.g. TVNZ+ and ThreeNow) being largely the only options to deliver significant cost-effective reach with video assets. The equation was simple – use TV to reach older audiences and online video to reach the younger ones.

However, we were all mostly comfortable with the efficacy of TV, but the online video options weren’t quite like for like. The skip button, the viewability metrics, the ability to target (i.e. exclude) audiences, and having non ‘fit for purpose’ assets always meant we were a little unsure on how YouTube and Facebook truly performed, and while BVOD gave us the feeling of a ‘premium’ video audience (low clutter, forced view), the reach and the cost has always been a concern.

Netflix, however, has the potential to give us the best of both. According to the 2021 NZ On Air ‘Where are the audiences?’ report, 64 percent of New Zealand households subscribe to Netflix, achieving a daily reach of 40 percent amongst those aged 15+, which is the same as YouTube (40 percent) and TVNZ1 (41 percent). Amongst 15-39 year olds, that daily reach jumps up to 72 percent* (compared to TV at 35 percent), and 48 percent* amongst 40-59 year olds (compared to TV at 61 percent)

(*note: the NZ On Air Report doesn’t break out as total Subscription Video OnDemand by age group, but it’s assumed that Netflix accounts for almost all of this, as daily reach of Disney+, Neon and Amazon Prime are all under 10 percent – refer to page 70 of the report). 

We also know it will likely perform well from an advertising effectiveness point of view: the audiences watching are likely to be highly engaged who have opted into view, which we know scores well on attention-based studies, and most of the viewing will happen on connected TVs, which we know is highly effective.

However, there’s still a lot we don’t know about what the advertising opportunities are on Netflix. There are the fundamentals (When will it happen? How will the report on audiences? What will it cost?), but the more exciting question, especially for us geeky media people, is what the advertising opportunities will be.

It’s fair to say Netflix changed the game in the online streaming world, so there’s a good chance they’ll do their best to reimagine what advertising opportunities could be.  I’d say it’s a safe bet that they’ll go beyond simply allowing advertisers to buy pre and mid-rolls, but the possibilities to go beyond that are endless, particularly because they have logged-in user data which is linked to a credit card.

We’ve seen great advertising innovations over the years by our very own TVNZ+ (née TVNZ OnDemand), including; ad on pause, in-stream ordering and sponsored content pillars, but it’s fun to imagine how Netflix could take this to the next left.

For example:

  • Will they only allow ads of a certain ‘cinematic’ quality to run on the platform, to match the type of content they currently screen?
  • Could they create integrated e-commerce opportunities directly within the programming allowing viewers to order pizza to be delivered?  
  • Could they create advertiser sponsored content pillars within the homepage?  i.e. instead of ‘binge-worthy shows’ it could be ‘KFC’s most craveable shows of the week’?
  • Will they make it easy to customise advertising creative to relevant logged-in audiences and/or content streams?
  • Will they leverage Microsoft visual technology to identify the shoes or handbag featured in the last series of Stranger Things and have the ability to buy directly with a suggested retailer??
James Davidson.

I’m sure there’ll be many more, and many better opportunities than these, which is what makes me so excited.

But why partner with Microsoft?  Early rumours pointed to Netflix partnering with Google or Comcast as their advertising sales partner, but that would be an awkward pairing considering YouTube and Peacock are a direct competitor to Netflix.

Advertising sales isn’t the first thing that comes to mind when thinking about Microsoft.  They have great products, including Xbox, LinkedIn, Azure, Mojang, Bing! (well, maybe not all great) but have failed to truly set themselves up as a advertising sales business.

However, this looks like it could be high on their agenda.  Microsoft’s Q1 ad revenue was up 23 percent on last year, after acquiring programmatic advertising company Xandr from AT&T in the hopes of creating a post-cookie ad, privacy conscious marketplace.  Furthermore, Microsoft have said they’re looking to introduce free-to-play games across computer and Xbox, which is a space Netflix has said they also want to play.

Perhaps, Microsoft will look to look to create their own version of a universal ID (similar to what Disney+ have just announced with the TradeDesk) to reach and target audiences in a privacy-safe manner across all of their platforms?  This would give them significant scale across premium inventory, particularly with the younger ‘hard to reach’ audiences, and chip away at the dominance google and meta have had over the years.

Or perhaps there’s something even bigger brewing??

For now, it’s still a bit of a wait and see. The initial reports back in May stated that Netflix CEO Reed Hastings was targeting Oct-Dec 2022 to launch the ad-supported pricing tiers (update: in their second quarter earnings call this week they announced it would likely be early 2023).  There’s usually a bit of a delay when it comes to new technology, and no doubt there’ll be a broader global roll-out (likely with the US and some of their targeted growth markets) before it comes down to New Zealand.  However, by this time next year, our AV landscape could look significantly different, especially when also thinking about the impending launch of the newly combined Warner Bros. Discovery streaming platform, advertising opportunities across Disney+, and potentially a reinvigorated Sky TV (it’s got to be now or never?!), there could be a myriad of new and effective advertising opportunities to reach our audiences and drive real business effects for our clients.

About Author

James Davidson is GM of Planning at PHD Media.