Netflix With Ads: Impossible or Inevitable?

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“Netflix needs a way to grow its U.S. revenue in ways beyond just raising the subscription price,” Brian Frons, former president of ABC Daytime and current UCLA lecturer, says

Stranger Things 3

Netflix and ads have long functioned like oil and water: They don’t mix. But as Netflix inches toward domestic saturation as it continues to grow globally, experts believe it’s only a matter of time before the streaming giant reconsiders its stance as a way to boost revenue and attract more subscribers. What are the chances of an ad-supported subscription option? As Netflix gets set to report its second-quarter performance Wednesday afternoon, the company has 60.2 million domestic subscriptions. With about 2.5 people watching per account, according to eMarketer analyst Eric Haggstrom, that comes out to more than 150 million people in the U.S. who watch Netflix. “Netflix needs a way to grow its U.S. revenue in ways beyond just raising the subscription price,” Brian Frons, former president of ABC Daytime and current UCLA lecturer, said. “One wonders why they would not add an ad-supported model.” Netflix would not be the first streaming service to feature ads. Several of its competitors offer both ad-supported and ad-free options. Hulu, for example, offers a $5.99 per month ad-supported subscription — a plan that brings in more revenue on a per-customer basis than its $11.99 per month ad-free subscription, according to two people familiar with the company’s streaming data. The reason: advertisers are desperate to reach streaming viewers, and they’re willing to shell out to do it. CBS All Access has similar offerings. Amazon Prime, meanwhile, shows skippable ads for its programming before each stream. Others are getting in on the ad-supported action, too. Quibi, the upcoming mobile-only streaming service from Hollywood magnate Jeffrey Katzenberg and CEO Meg Whitman, already has banked $100 million in ads — almost a year before the service is scheduled to launch. And Pluto TV, which offers more than 100 ad-supported channels for free, was bought earlier this year by Viacom for $340 million. “Online and mobile video advertising was worth over $16 billion last year in the USA,” said Richard Broughton, research director at Ampere Analysis,equalling “approximately the same size as the subscription OTT market.” Netflix, as the dominant streaming company in the world, is better positioned than anyone to soak up digital ads, if not for one major roadblock: Netflix CEO Reed Hastings has said keeping the service commercial-free will be a key differentiator. “No ads coming to Netflix. Period,” he said in 2015. He reiterated his stance last year. “Really having [a] great experience — no advertisements or chopping up all of the content — vastly outweigh[s]” any monetary benefit YouTube and Hulu enjoy from ads. Netflix has shown it’s more than willing to market its own shows, with the company spending tens of millions of dollars last year to buy several billboards along the Sunset Strip in West Hollywood. As Netflix has continued to grow its original content business, its marketing spend has increased dramatically. In 2016, Netflix spent $842 million on advertising; last year, that figure jumped to $1.8 billion. Still, Hasting’s position might slowly be changing. In the last year, Netflix has increasingly focused on adding employees with digital advertising backgrounds, according to a person familiar with its hiring process. A Netflix representative said any employees with advertising expertise are strictly focused on marketing and that the company has not changed its stance on keeping its subscriptions ad-free. Netflix has helped fuel its growth in the last two years by adding global customers. It’s succeeding, with a company-record 7.9 million international subscribers signing up during the first quarter of 2019; Netflix has projected it will add another 4.7 million international subs in Q2, which would push it to nearly 155 million accounts overall. Adding subscribers has been Netflix’s clear driver of revenue growth. Netflix is also making more money off of its customers, after it raised its subscriber fees about 20% earlier this year. That isn’t a move Netflix can consistently turn to, however. While 70% of U.S. customers said they’re willing to pay more for their service, according to recent survey data compiled by MoffettNathanson, they’re not willing to pay much more; 16% said they’d pay up to $1 more per month, while 26% said they’d pay between $1-2 more. Another 30% said they wouldn’t pay a penny more than they already do. This is where an ad-supported Netflix could pay dividends. A lower-cost subscriber tier would allow Netflix to target reticent viewers who have been interested in checking out “Stranger Things” but have been unwilling to pay for its Basic $8.99 monthly plan. Grabbing those new viewers, along with the advertising dollars that would come with it, would give Netflix another revenue stream and safeguard it against poor quarterly growth from its main ad-free business. Kevin Herrera, CEO of TheMachine, a talent management and production studio, said he expects an ad-supported version within the next year. “My best bet is they’re going to do a version that’s completely free and ad-supported,” Herrera said. With Netflix expected to report nearly $5 billion in second-quarter revenue on Wednesday, that fallback option might not be needed immediately. But as more competitors enter the market — Disney+, HBO Max and Apple’s streaming service will all be available within the next year — Netflix may be more reluctant to raise prices. If that’s the case, an ad-supported subscriber option might start to gain traction. Not all advertising would be worthwhile for Netflix. Simply wedging ads into its shows, or placing a banner ad along its homepage. would be a major risk. Netflix, like HBO, has become synonymous with prestige TV — a place users do not want to see muddled with ads. Nearly 25% of subscribers recently said they’d consider dropping Netflix if it started running ads. If Netflix did explore ads, launching a new, cheaper subscriber tier that still allows current customers to keep their ad-free plans in place is likely the best move. Michael Pachter, an analyst with Wedbush Securities in Los Angeles, suggested one other “baby step” for Netflix could be merely running ads for its own shows, in an effort to increase awareness. Netflix tested this idea last year — and had to quickly satiate worried users by saying it was a small, skippable trial. “I do think they’re going to advertise their own shows,” Pachter said, “And if that’s successful, maybe they’ll consider brand advertising years from now. But nothing is imminent.”