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Netflix began the week valued at $59 billion less than it was last Monday. Despite seeing record quarterly revenue of $7.9 billion, the world’s largest streaming service lost 200,000 customers in the first three months of the year.
While Wall Street quaked, Madison Avenue rejoiced as Netflix announced it would finally open up its service to advertising.
It’s a win for consumers, marketers, ad tech and Netflix itself, adding billions to its bottom line. (For comparison, Hulu, which has an ad-supported tier, brought in $2.1 billion in ad revenue for the year ending September 2021.) Even before Netflix’s dismal subscriber news, Accenture revealed new data showing consumers are willing to watch commercials if it means spending less:
- 63% think paying for all the entertainment subscriptions they want is too expensive
- 73% would not pay more to remove ads from their shows
- 88% plan “no change” or a “decrease” in their entertainment spending next year
Armed with data points like that, Netflix is ready to add ads. But six industry executives Adweek spoke with say the road to an ad-supported Netflix will not be without bumps. Here, they debunk some of the biggest misconceptions about Netflix’s foray into advertising and what challenges lie ahead.
“Ad tech is a messy industry,” said John Hamilton, CEO of CTV ad performance platform TVDataNow, noting that the industry has different values and goals than a publisher. “It’s going to be a challenge for Netflix to figure out how they’re going to integrate that sort of culture into a culture that’s obviously different.”
Even if Netflix works with ad-tech firms “to do all of the fancy ad matching,” as founder and co-CEO Reed Hastings said in the company’s earnings presentation last week, connected TV ad buying faces a host of challenges around privacy, fraud and measurement.
AVOD is old news and Netflix is playing catch-up
Netflix is the last major entrant to the ad-supported video on demand (AVOD) space. And it has some catching up to do. HBO Max with Ads launched last year and Disney+ is bringing an AVOD-tier to the marketplace this year.
Disney and NBCUniversal have dedicated ad tech events during the annual TV upfront sales season, further exemplifying the continued merging of video publishers and ad tech platforms.
In order for Netflix to compete, it needs to hire salespeople specifically to sell ads and build or buy the ad technology infrastructure, said Hamilton, and the ability to serve, sell and track ads, which can be achieved through partnerships with existing ad tech companies, added Mark Zagorski, CEO of DoubleVerify.
“The good news for Netflix is this is not 2005, it’s 2022,” Zagorski said. “We’ve had half a decade now of pretty consistent selling and monetization of connected television impressions.”
What’s more of a challenge for Netflix than for other publishers like Hulu or Peacock, which have ad-supported tiers, is that the company is global, and therefore requires global partners. Any ad tech partner also needs to have omni-channel capabilities since Netflix can be consumed cross-platform.
“There’s only a couple of SSPs when you frame it through those criteria that are an option,” said Rajeev Goel, co-founder and CEO of PubMatic.
Netflix will have to rely on established and sophisticated ad tech players given its global reach and the complexity of managing different ad serving rules and internet service providers across different countries, added Shailin Dhar, CEO of ad tech measurement firm Method Media Intelligence. The company’s size will further constrain the technology partners it can choose, Dhar said.
“The more players you get involved the harder it is to control data leakage,” Dhar said “It would be very risky to partner with smaller emerging companies.”
Despite the windfall Netflix is expected to bring to the ad tech industry, there isn’t wide open green space for ad tech startups, said Matt Spiegel, evp, media and entertainment vertical at TransUnion.
“There’s a handful of companies that they can work with to really put this together,” he said.
The challenges of integration
The biggest challenge for Netflix in entering the AVOD marketplace could be a mindset shift from a pure play publisher to one with the sensibilities and technology for advertising.
“Moving from a subscription model to an ad supported model is never easy,” said Zagorski. “Changing the dynamics of the culture, which has been so adamantly opposed to ad monetization of content is probably the toughest.”
TVDataNow’s Hamilton said that media companies and ad tech companies have significant differences in how they approach the market.
“They’ve been focused on ‘how do we create really awesome content and get subscribers,’ which is totally different than ‘how do we sell ads to make sure the ad experience is a part of the positive experience for our consumers,’” said Hamilton.
Other publishers have tried and failed to break into the ad tech space. AT&T launched Xandr in 2018 after acquiring AppNexus. AT&T folded it into its WarnerMedia division, but last year sold it to Microsoft. AT&T then spun out WarnerMedia, furthering its focus on wireless.
The technology still faces challenges
Netflix will need to rely on the existing ad tech ecosystem to successfully serve its ads, ensure they are matched against the right content and measure performance. But these companies have not always lived up to their promises.
Ad tech companies have been powering digital advertising on the open web for decades, but already in 2022, studies have found ad tech companies responsible for siphoning off huge swaths of publisher revenue and not catching misdirected ads. CTV anti-fraud protections are less mature and more susceptible to bad actors.
“There’s a lot of overhang with the open web monetization ecosystem because there’s been issues with brand safety and fraud,” said Stephen Master, principal at private equity firm GTCR, who focuses on ad tech investments.
Some of these challenges are specific to programmatic ad buying, which Hamilton said Netflix would be unlikely to introduce immediately (if they do at all).
CTV ad tech still has not completely resolved the challenge of measuring how many and which viewers are watching shows and ads. Netflix will feel this problem acutely given its rampant password sharing.
“If you’re targeting ads to a Netflix account used by 8 different people, you might have some targeting issues,” Method Media’s Dhar said.
