The No. 1 streamer’s rapid push for an ad-supported tier could be vastly helped by acquiring the established AVOD service and its technology
Netflix’s desire to quickly ramp up an ad-supported tier — and the streamer’s reported interest in acquiring the video streaming platform Roku — may be driven by a very specific and very lucrative motivation: political advertising.
“There’s a $9 billion pot of gold at the end of the rainbow if Netflix can get live with ads by September,” Dallas Lawrence, senior vice president of Samba TV, told TheWrap.
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The projected $8.8 billion spend on ads for the 2022 midterms represents a massive leap from the $3.9 billion spent for the 2018 midterms and comes close to the $9.5 billion laid out during the 2020 presidential election. This would be the highest amount ever conjured up for a midterm election as races for the House and Senate continue to heat up.
With such a robust market looming on the horizon, Netflix may view Roku — which boasts an established and successful advertising-based video on demand (AVOD) infrastructure and has grown to more than 60 million domestic active users — as a valuable shortcut to fuel the streaming giant’s AVOD ambitions.
Representatives for Netflix and Roku declined to comment for this article.
“Netflix moves fast. The whole company is designed to be a lean, mean, entrepreneurial machine,” David Offenberg, associate professor of entertainment finance at LMU’s College of Business Administration, told TheWrap. Given that company identity and the financial crunch Netflix is enduring since reporting a 200,000 subscriber loss in the first quarter, he expects the streamer to build the AVOD side of the business at record speed regardless of the upcoming election opportunity, which is looking like a potential added bonus.
“The midterms will help juice their numbers out of the gate. It’s certainly going to look good from Wall Street’s angle, and it will probably give them a nice boost of revenue,” Offenberg said.
In May, Netflix executives told employees that the market-leading streaming service was aiming to introduce its upcoming ad-supported tier by the end of 2022, much sooner than expected. Netflix co-CEO Reed Hastings initially told investors that an ad-supported tier might come in the “next year or two.” (Historically, Netflix leadership has always opted to build internally rather than rely on outsourcing or external acquisitions to obtain needed infrastructure or software.) At the Future of Entertainment panel at the Cannes Lions conference Thursday, Netflix co-CEO Ted Sarandos confirmed that the streamer is in talks with potential partners for its upcoming ad-supported service.
And Roku stock, which has seen a steady decline all year, saw a brief rebound earlier this month on unconfirmed reports that Netflix might be considering an acquisition of the company, which was developed within Netflix before being spun off in 2008 ahead of the launch of the first Roku set-top box. (Roku stock closed Wednesday at $91.19, down from its 52-week high of $490.76.)
However, it remains unclear if the two sides could complete a deal in time for Netflix to benefit from midterm election ads. The Walt Disney Company’s purchase of 21st Century Fox didn’t become official until 12 months after it was first announced — and it took nearly a year for Amazon’s acquisition of MGM to close. Even Sony’s purchase of anime streaming service Crunchyroll stretched out nine months. Then again, Warner Bros. Discovery began trading on the Nasdaq only about 10 weeks after AT&T announced the spinoff of WarnerMedia.
Even if the timing worked out, not everyone views the swirling streaming rumors as Netflix’s strategic inroad to a lucrative yet polarizing new arena.
“I do not feel this is a Trojan Horse to enter into the political ad space,” Michael Lyons, chief investment office of JuiceMedia.io, a media activation agency for global brands and direct-to-consumer companies, told TheWrap. “Although it is likely tempting, political advertising is extremely divisive and would likely lead to a negative brand experience, so the short-term gain may not outweigh the long-term brand impact.”
Disney, which his notoriously protective of its family-friendly brand, has already indicated that its upcoming ad-supported tier for Disney+ will not host political or alcohol commercials — unlike Roku, which already accepts such ads.
Regardless of whether or not there’s any actual fire to this Roku acquisition smoke (“We don’t need it,” Sarandos said of Roku Thursday), Netflix is on the precipice of a massive new revenue generator. Political ad buyers have long yearned to possess digital precision and targeting on the most populous TV network in the world, but have never had that opportunity. While political campaigns have invested in connected TV ad inventory in the past, prime placement on Netflix would represent an entirely different animal.
“The ability to buy Netflix inventory would ensure there would not be a second of Netflix screen time unpurchased by political ad buyers this cycle,” Lawrence said.
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This is arguably both a short- and long-term strategy. All of the same buyers scrambling for exposure in the upcoming fall midterms will also be buying in the 2024 presidential election less than two years from now. A fall launch of Netflix’s AVOD tier could be used as a testing ground for targeted programmatic advertising ahead of 2024 — when political ad spending could easily exceed $10 billion.
Yes, Netflix has softened its previous stance on AVOD only after its dramatic stock tumble this year demonstrated an urgent need to diversify its revenue streams at time when subscription growth has plateaued — or even reversed. Self-preservation is a powerful motivator, after all. (Netflix shares closed Wednesday at $178.89, down 70% from the start of the year.)
While landing political ads may be a factor, Lyons said, “This is a way for Netflix to better monetize its acquired content and ensure that its distribution network is secure.”
With a recession looming and the prospect of layoffs and consumer belt-tightening, Netflix wants to secure as much of its subscriber base as possible by giving consumers a less expensive option. On the flip side, Offenberg noted that ad spending tends to dip during recessions, so Netflix could be launching into a bleak advertising winter once those midterm campaign ads end in November.
Some analysts expect that Netflix might be able to reinvent the AVOD model altogether and offer a better value proposition for prospective advertisers than its rivals. “It would be really surprising if a company as advanced and as capable, with such great talent resources, just delivered the same ad experience legacy media is doing,” Jon Cohen, SVP of Frequency, a provider of ad-supported content packaging distribution, told TheWrap. “Maybe at the beginning they will, but I’d expect them to innovate for this. They’ve done so in almost every other regard in their evolution.”
Brandon Katz is an industry strategist at Parrot Analytics, a WrapPRO partner.