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 people—as many as possible—to 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.