Netflix Remains Ad-Free, Keeps 'Brand Proposition'
- by Wayne Friedman , July 18, 2019
Despite heavy speculation, Netflix will remain advertising-free.
In a letter to the shareholders, the company said: “We, like HBO, are advertising-free. That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false.”
It adds: “We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”
This announcement comes as Netflix releases surprising second-quarter results. Subscribers -- both internationally and in the U.S. -- were far lower than expected.
Globally, Netflix had been estimating a gain of 5 million; it only increased 2.7 million. In the U.S., there was a projection of around 350,000. Instead, it took on a 130,000 loss.
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Netflix's global subscribers are now at 151.6 million, with 60.1 million in the U.S.
A growing number of TV and media executives have said they expect Netflix to strongly consider advertising support, given its growing overall original and acquired TV/movie content production costs. They are estimated at $15 billion this year.
Bernstein Research projects Netflix’s cost of revenue to be $12.9 billion this year, $15.8 billion in 2020, and $17.5 billion in 2021.
Strange, this anti-ad business. Especially as most Netflix subs watch quite a bit of "linear TV" and are exposed to those evil ads on a daily basis.
It's just economics, Ed. Supply and demand. Netflix's customers are subscribers, not advertisers. And there is no demand among Netflix subscribers for advertising.
Think about it. If Netflix tomorrow asked all its subscribers if they would like some advertising, what percentage do you think would say yes? Would it be more than zero?
If ad-filled linear TV networks and stations asked their subscribers if they would like to do without advertising for the same price they're paying for cable or satellite service, what do you think the results would be?
The simple fact is that we have advertising on linear TV because advertisers are its biggest customers. We don't have it on Netflix and HBO because advertisers are not its customers. Subscribers are. And among subscribers there is no demand for advertising. There is tolerance for it. But no demand.
If Netflix's costs exceed its sales, that's a problem for it, as it would be for any business. But lots of businesses succeed by gearing up with small or negative profit margins. Look at Amazon.
Netflix is playing a long game, and it appears to be succeeding. And it does so by satisfying customers it knows well.
Doc, you are absolutely right. If either Netflix or "linear TV" asked their audiences what they would like regarding ads --in the former case to remain free of ads or, in the latter case, whether they would prefer no more ads---- the results would be overwhelmingly in favor of no ads. However if the "linear TV" survey pointed out to its respondents that without ads they would get almost no sports or news or primetime dramas and sitcoms as well as many other types of content, then I expect that many might reconsider. In the same vein, if Netflix gave its subs a choice of continuing, as before, without ads or opting for a cheaper priced platform with ads---but not as many ads as are seen on "TV"--- I find it difficult to understand why those who supposedly are up in arms about those annoying TV ads would "punish" Netflix by cancelling, when they could simply continue with the ad-free service.
I think that some people go overboard on the idea that the only reason why Netflix exists is no ads. And, coupled with this is the supposed "revolt" of "smart" Americans---the younger set----against TV ads---yet these are the same folks whocontinue to devote more time to ad-filled "linear TV" than to digital videos and the same people who are flocking to digital platforms, in general, despite their annoying ads and "tracking" practices plus the very disruptive nature of ad pacements, excessive ad clutter, etc. that have become the hallmarks of digital advertising. I see a contradiction between these varying assumptions and actual consumer behavior.
In fairness to your point of view, I should note that many internet users now use ad blockers---I'm one of them-----so this is something that we should bear in mind. Also, as ad clutter on TV keeps rising---as it seems likely to do----the powers that be in TV Land may be on the verge of killing their golden goose. However, at present, "linear TV" viewing is holding up very well, with a reduction of only 3-4% in time spent annually---but much more among the light viewing, millennial set.
Still, as a purely business proposition, I see an ad-supported platform for Netflix as the only breakthrough option if it plans to dramatically reduce its massive debt and prepare for major competitive inroads by rivals competing for its subscribers with a much reduced program library. Mybe it will work, maybe it wont, buy there's nothing to lose by giving it a try and lots to lose by waiting. Just my opinion.