Why Netflix May Add Ads

Netflix announced its first subscriber loss in over a decade on Tuesday, forcing a legacy streamer stuck in its ways to reevaluate its approach in an increasingly crowded market. In a turnaround from a years-long position, co-founder and CEO Reed Hastings said that an ad-supported tier may be in the company’s future to drive further revenue and reduce churn—and buyers are ready for it. “The challenge that we had in streaming was that the majority of viewership time was being spent on platforms that were not ad-supported, like Netflix, which created inventory scarcity in streaming, and quite frankly, limited the reach potential,” Kelly Metz, OMG’s managing director of advanced TV activation, told Adweek. Netflix has been staunchly against ads since the launch of its streaming division. Still, an increasingly crowded market, rampant password sharing and tumultuous world events have eroded subscriber growth and forced the streamer to evaluate other options. Netflix Loses Total Global Subscribers for the First Time Since 2011 Last month, Netflix CFO Spencer Neumann hinted first at the possibility of an ad-supported model during an investor conference, noting that the streamer would “never say never.” While Netflix hasn’t offered up any further information on how an ad-supported tier would work, it would join the ranks of competitors such as Peacock, Hulu, HBO Max, and, most recently, Disney+. CEO Reed Hastings said Tuesday that Netflix’s offering would be a plan layer like at Hulu, meaning that if subscribers still want the ad-free option, they’d be able to have that. “If you'd rather pay a lower price and you’re ad tolerant, we’re going to cater to you also,” said Hastings. And some consumers don’t seem to mind ads. In December, research from Forrester found that 44% of U.S. online adults who use a streaming service would rather have ads or commercial breaks so they can pay less for it. Price plays an important factor. The same report found that 43% of consumers are concerned with how much they’re paying for all of the streaming services they subscribe to. Netflix hiked its prices in January for the first time since 2020, and the streamer partially blamed the increase for the dip in subscribers. Buyers are ready As the largest streaming service in the world with 221.6 million subscribers (plus the additional estimated 100 million households from password sharing), Netflix’s audience has long been attractive to buyers and opens up more inventory in a limited marketplace. “The introduction of Netflix ads should open up more opportunity because what’s important with the video marketplace as dollars shift from linear to streaming, the budgets aren’t necessarily going 1:1 into the streaming landscape,” Samantha Rose, svp, strategic investment lead at Horizon Media, told Adweek. “There's a third or half of the commercial load available in streaming as there is in linear TV. So even if a small portion of Netflix subscribers shift to this ad tier, that's going to open up the ad opportunity down the line and could be really helpful for us,” she added. Ad dollars have increasingly shifted from linear to streaming over the past few years, and a Netflix advertising tier could further accelerate that trend. “This is thrilling. We’re excited to see how this all unfolds and how they build their ads business because they certainly have a very strong history of changing the way the industry operates,” said Metz. “This reality that Netflix is going to introduce ads represents a huge opportunity for the advertising industry.” An ad-supported Netflix will also help buyers and consumers manage their budgets in an increasingly expensive streaming world. “We were all looking at our budgets thinking, when does this end? We can't continue to afford all of these different streaming services that are ad-free,” said Metz. “The ad-supported model just makes sense. It is the value exchange that has existed since the beginning of television. There are very few holdouts right that are ad-free, and now that Netflix joined us. It's going to be a great opportunity for all of us and for our advertisers, and we're absolutely looking forward to it.” Keeping up with competitors There’s little doubt that the success of rival streaming services has caused Netflix to reevaluate its model. Disney alone has 196 million global subscribers across its platforms, led by Disney+ with 129.8 million. In addition, HBO and HBO Max combined for 73.8 million subscribers globally at the end of the year, up more than 13 million a year prior. “A couple of years ago, Netflix asserted that its main competition was Epic Games [the maker of Fortnite], not the other streaming services. However, it’s clear now that many of the other streaming services must be taken seriously as formidable Netflix competitors — especially as those competitors grow, acquire and merge their IP to gain more reach and scale while offering, or planning to offer, different price points for ad-tolerant viewers,” Mike Proulx, Forrester vp and research director, told Adweek. “Hubris is what has hurt Netflix, and the company is now on the defensive. But it’s clear from yesterday’s earnings call that the company is more open-minded to changing its business model,” he added. An ad-supported Netflix tier could likely follow along the lines of an HBO Max or a Disney+, both of which initially launched as SVOD-only platforms, rather than a Hulu or a Peacock, which debuted with AVOD offerings. Since Netflix has no foundation for an ad-supported model, it will likely be at least a year before customers see an option for a lower-priced AVOD tier. “It would phase in over a couple years in terms of being material volume,” said Hastings. “And in terms of the profit potential, definitely the online ad market has advanced, and now you don’t have to incorporate all the information about people that you used to. We can be a straight publisher and have all of the other people do all of the fancy ad matching.” This Year’s Upfront Might Feel Like Business as Usual, but a Metrics Revolution Is Underway

Streaming & OTT

Here’s Why Netflix May Add Ads

An AVOD approach opens up more inventory and opportunities for marketers

Mollie Cahillane

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Mollie Cahillane