Commentary

As Netflix Becomes Most Valuable Media Company, Will Ads Follow?

Netflix, since its founding, has been pretty clear about one thing: the service does not have advertising. No pre-rolls, no mid-rolls, no interstitials, nothing.

The company’s revenue model is a simple one: Get peopleas many as possibleto subscribe.  Then, keep them subscribing.

The company’s staggering growth suggests that the model is working. Last week, Netflix surpassed Comcast—and briefly, The Walt Disney Company—in market cap, becoming the most valuable media company in the world.

Next up to surpass? Telecom giants like AT&T and Verizon.

But will Netflix be able to get there without advertising? Many in the advertising industry think not. Their logic is twofold. First: the streaming services that have had the strongest growth over the past year or so have been free, or if not free than at least ad-supported. Second: Netflix could hit a ceiling on U.S. subscribers in the near to medium term future.

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“When that happens, they are going to be looking for more revenue opportunities,” said Sophie Kelly, senior vice president of the North American whiskeys portfolio at beverage giant Diageo, speaking at an Interactive Advertising Bureau event late last year.

It was a sentiment shared by CBS’ ad sales chief at an event early this year.

“Maybe they will offer an ad-free version or a lower-cost version with ads in it,” Jo-Ann Ross said at AdExchanger’s Industry Preview event in New York. “If they are spending that kind of money, they are going to look for other ways to monetize.”

Ad-supported OTT is indeed on the rise, with free services like Crackle and Xumo seeing their viewership rise each quarter, and ad-supported subscriptions such as those offered by Hulu and CBS All Access gaining in popularity.

While it makes sense that consumers would supplement their cable or satellite bill (or theirs streaming bundle bill) with Netflix and some free OTT offerings, does it logically follow that Netflix will do a 180 and embrace advertising?

In one respect it already has. The investment bank B.Riley FBR estimates that the company could spend north of $2 billion on marketing and advertising in 2018, making it a major spender.

Of course, executives at the company have tempered the expectations of marketers hoping for a crack at the platform. CEO Reed Hastings, on almost every quarterly earnings call, dismisses the possibility that his platform will feature ads. “[Being ad-free] is a core differentiator,” Hastings said on a recent call.

Indeed, even if domestic growth slows, Netflix does not need to rush to the ad well. Internationally, it has barely scratched the surface in terms of subscribers. As the company ramps up its international content production, those numbers are only going to rise.

So while marketers may be salivating at the possibility of bringing their products to the Netflix app, the company does not appear to be in any hurry to change its no-ad policy.

7 comments about "As Netflix Becomes Most Valuable Media Company, Will Ads Follow?".
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  1. Ed Papazian from Media Dynamics Inc, May 29, 2018 at 8:06 a.m.

    Eventually, Netflix will have to pay off its massive debts-----unless some giantic entity buys it. And there is no doubt that its share of SVOD/)TT viewing, which has dropped from more that 80% a decade ago to only 40% will continnue to decline as more and more players compete for viewing time----and dollars. Obviously a two-tiered approach, one of which involves ads in exchnge for reduced subscription costs, is the way forward.

  2. Carlos Pacheco from Truly Social Inc., May 29, 2018 at 8:16 a.m.

    uh, have you watched a Netflix original in the last 4 years? Every single one is chock full of product placements... unless you thought Oreos in space was a total normal thing. Just because they don't sell ads directly from media buyers doesn't mean that Netflix isn't already making a significant amount of money from ads. 

    Although the product placement can be cringworthy at times its 1000% better than any traditional ad supported channel and I believe/hope that Netflix will stick to it. 

  3. Ed Papazian from Media Dynamics Inc, May 29, 2018 at 9:16 a.m.

    Carlos, I have seen many attempts to define the value of product placement as opposed to conventional ads and, so far, my conclusion ios that the latter probably have much more branding effect---even though the audience knows that it is being sold. This is not to say that product positioning has no value, but it's one that is very hard to put a numerical value on and the amount that advertisers might spend on an ad-supported Netflix service---even with a smaller sub base---is huge. Can Netflix resist that temptation? We shall see.

  4. Douglas Ferguson from College of Charleston, May 29, 2018 at 8:36 p.m.

    People in the advertising world don't seem to understand the obsolescence of pre-roll clutter or mid-roll interruptions. People don't want them and will fight hard to keep them away. Advertising that is not a choice (e.g., outdoor) has always been an American idea. I don't think the Hulu model is so obvious.

  5. Doc Searls from ProjectVRM, May 30, 2018 at 11:20 a.m.

    Neither Netflix debt nor its spending on advertising itself have any bearing on whether it will choose advertising as a business model.

    Everything about Netflix history, and its appeal to subscribers, make clear that there's no way.

    Netflix is a pure subscription service and damned good at it. And lack of advertising is one of the main things that makes it good.

    When all you've got is a hammer, everything looks like a nail. That's why "many in the advertising industry think" Netflix won't be able to get along without advertising. What they miss is that Netflix' lack of advertising is one of the nails it's hammering in old-fashioned TV's coffin and a lot of advertising will be buried along with it.

  6. Ed Papazian from Media Dynamics Inc, May 30, 2018 at 12:02 p.m.

    Netflix is today's HBO of the late 1970s and early 1980s. No ads and great sucess but somehow, commercial TV not only survived but prospered. There are those who believe that the world---those under the age of 40---as the rest don't count----is in rebellion against commercials and that commercial TV is doomed by mighty Netflix--which has captured 6-7% of all viewing time compared to 85% for doddering, hoplessly outclassed, "linear TV" --which  some will glibly tell us wont be around for long. No matter that ad recall and camera studies  show that many 18-34s do, in fact, watch TV commercials and their visual attention is on the screen only 10% less often than is the case with older viewers, such evidence is ignored and the drumbeat of doom and gloom for TV goes on and on. Breaking news: not running ads is not the main reason why most Netflix subscribers buy that service---it's the programming and how it is served.

  7. Gabriella Mirabelli from ANATOMY, May 31, 2018 at 8:06 p.m.

    During a lunch with Ted Sarandos on Tuesday May 29, he was asked “Will Netflix ever have advertising?” His answer?  “No. Core to our consumer promise is not to have advertising. We believe subscription is the better monetization model for the content we’re creating.” Further, while they are a data driven company that collects (and anonymizes) reams of data on its users - he said they don’t collect age and gender information, because they aren’t selling ads and don’t need it. What they do collect helps them better craft a product tailored to each user. 

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