4 Things We Learned About Netflix’s New Advertising Strategy

During Netflix’s second quarter earnings announcement Tuesday evening, the streaming service didn’t fully take the wraps off its upcoming ad-supported tier, but the company did share more details with investors about its new advertising strategy. Executives revealed a tentative launch date for the offering, which they expect will arrive in early 2023. That's slightly later than earlier reports, which indicated the company had hoped to debut it as early as the end of this year. The company also reported 220.67 million global subscribers in the second quarter, a global loss of nearly 1 million subscribers, but far better than the 2 million dip it had projected in April. In a video interview following its earnings announcement, Netflix executives spent a significant amount of time discussing its advertising strategy. Here were the biggest things we learned about its ad-supported plans: Microsoft Proves Itself to the Ad Industry With Surprise Netflix Deal Microsoft will be the only ad partner When Netflix and Microsoft announced their advertising partnership last week, the two tech companies kept quiet on the details. Despite previous reports that Comcast NBCUniversal and Google were in the running to work with Netflix, COO and chief product officer Greg Peters confirmed the advertising deal is exclusive to Microsoft. “All of the ads that are served on our ad supported offering will come through Microsoft. So that's an exclusive real arrangement with them,” Peters said during the video interview. A big draw for Netflix to partner with Microsoft is the company’s flexibility and privacy offerings, though Peters also pointed to complementary technical capacity and a go-to-market capacity. “A key component of what we liked about this partnership was that there was sort of a flexibility in that innovation orientation that I mentioned before, and so they very much I think, are approaching this as an opportunity to work together to collaborate and to sort of evolve both the technical capacity and also know, sort of what the experience is and what the go to market approach is. So we've got lots of flexibility to work together there and evolve that over time,” said Peters. Meanwhile, AWS will remain Netflix’s cloud infrastructure partner. Revenue will start out small Though Netflix is on an accelerated timeline launching its ad-supported tier, the company knows the offering won’t immediately be profitable.According to Peters, Netflix is looking at monetization of the ad-supported tier as a complement to its standard offering. “While we’re thinking about the right pricing model there, we also want to keep it as simple as possible from a consumer-facing perspective. In terms of the on ramp, the plan selection, how upsells happen, we want to work those flows over time so we build into that complexity without making it overwhelming for consumers,” said Peters. The company will first roll out the ad-supported tier in countries that have more mature ad markets and plans to explore further countries throughout the year. “We feel quite confident that as we grow into this, and we have more subscribers over time on these plans, that at least initially the unit economics are going to be quite good,” said Peters. “This is going to start small relative to our total revenue mix, but we think we can grow it to be substantial over a period of time.” “This is going to build over time. It's not like all of a sudden, all folks on ad-free Netflix are going to join advertising Netflix,” added CFO Spence Neumann. “And so supply demand, I think probably works in our favor between both geography as well as opening up the aperture to our members.” Netflix Loses Nearly 1 Million Subscribers, Sets Ad Tier for Early 2023 Some Netflix content won't be on the ad-supported tier Netflix is going to need to renegotiate some of its deals with content providers in order to monetize through advertising. That means that until those deals are done, not all of the content currently available on Netflix will be accessible to subscribers of the ad-supported tier. According to co-CEO and chief content officer Ted Sarandos, the “vast majority” of what people currently watch will be included in the AVOD offering. “There’s some things that don’t, that we’re in constant conversation with the studios on, but if we launched the product today the members in the ad tier would have a great experience,” said Sarandos. “We will clear some additional content, but certainly not all of it,” adding that that he doesn’t view it as a material holdback to the business. 'Paid sharing' could drive ad-supported signups Last quarter, Netflix told investors that Netflix is in 100 million additional homes outside of its paid subscriber numbers due to password sharing. The streamer, which previously indicated it would crack down on password sharing, is now set to roll out “paid sharing” in 2023, following testing in Latin America. The company has been working for nearly two years on building technical capabilities for paid sharing and two models have emerged. In the first, customers pay more to add a member and share with those additional members. The second model is an extra cost to share with additional homes. “At this point, we'll sort of see what works for consumers,” said Peters. “We're learning a lot on a daily basis at this point in time based on what we've deployed. We’re just getting going on the second approach, so we'll learn more from that. I would say we're tracking quite well and I am increasingly confident that based on what we're seeing that we'll have something that we can deploy next year as we were planning.” While both the AVOD tier and paid sharing are set to deploy in 2023, the company is still pursuing both strategies "independently," said Peters. However, he acknowledged that paid sharing will motivate some consumers to sign up for their own plan, and the lower-priced ad-supported offering could help "convince" them to do that.