Peering Into Netflix's Ad-Supported Future: So Many Questions

Change is in the air at Netflix as the streaming-first company seeks to build a lower-priced subscription tier supported by advertising after pooh-poohing the ad-supported TV model for years.

With that in mind, here are a couple of questions:

Question No. 1: Why? The reasons seem pretty obvious. Subscription growth has stalled, but the company’s annual commitment to investing billions in new and licensed content -- projected to top out at an estimated $17 billion this year -- has not.

Thus, the company could use a fresh, new revenue stream. So why not advertising? Everybody else does it, so why shouldn’t Netflix?

Netflix has 221 million global subscribers. That’s a precious resource with loads of untapped revenue potential from advertising. Seen in that light, Netflix would be crazy not to launch an advertising business.



Question No. 2: How will the ads run? Netflix has no experience with commercial placement, but it is not really that difficult to figure out. 

Commercials can come at the beginning or end of shows, or in them. Maybe the model is YouTube, which runs a spot or two before the videos begin -- some skippable and some not.

Commercials at the end of Netflix shows could be problematic, however. They would interfere with one of Netflix’s key features -- the seamless “countdown” and transition to the next episode. Maybe that won’t be part of the new tier, however.

For Netflix, running commercials during original content such as “Stranger Things” (pictured above) would be disruptive because that show and hundreds of others produced for streaming are simply not built with the capacity for “natural” breaks in the manner of network shows.

This never seems to stop basic cable channels and, increasingly, the old networks themselves from breaking into their own shows for commercials, whether an actual “break” exists or not.

But Netflix still has to be a careful steward of the way it mounts and presents its shows -- at least for now.

In-program commercials might work better for Netflix within the off-network content it licenses because, generally speaking, those shows were designed for commercial breaks.

The broadcast and cable networks all run commercials during their own shows that they make available on their own ad-supported web sites. Netflix could just do something like that.

If the evolution of advertising on TV -- particularly on basic cable -- is any indication, Netflix will eventually load up the shows on its ad-supported tier with commercials without regard to the disruptions they will cause. This is the nature of the beast.

Question No. 3: What about data? Netflix has not exactly been a big sharer of viewership data because it hasn’t really had to. 

Now, though, Netflix is entering a business in which data plays a more important role than ever before.

Prospective clients will demand data. What good does a 221 million sub count do us? Who’s watching, how many of them are there, where are they, what are they like?

For that matter, how does Netflix quantify its viewership in the first place? Minutes spent watching? Episodes binged? Time spent on the home page grazing? 

Another question: Will Netflix viewership and demographic data eventually come to resemble the kind of data the rest of ad-supported television uses? Or will Netflix have its own qualitative and quantitative stories to tell?

Question No. 4: Will shows be more disposable on Netflix now that they will be subject to their own expense-to-revenue ratios? 

Or to put it another way, will Netflix, at least on its ad-supported tier, now be in the business of cancelling shows that do not meet the company’s audience and ad-revenue goals?

Netflix does jettison some shows today based on whatever metric the company uses to measure subscriber interest in them.

But considering a show’s value as a generator of ad revenue, weighed against the cost of producing it, is a whole different ballgame.

It has the potential to change the way Netflix manages its content, both original and licensed. Shows (and their audiences) will begin to be looked at for their attractiveness to advertisers and ability to make money.

But at the same time, Netflix must continue to fill its pipeline constantly with new, prestige content, regardless of ad-revenue potential, to satisfy subscriber expectations and retain them.

So many questions ...  But the answers will come early next year, which is when Netflix says its new ad-supported tier will make its debut.

1 comment about "Peering Into Netflix's Ad-Supported Future: So Many Questions".
Check to receive email when comments are posted.
  1. Ed Papazian from Media Dynamics Inc, August 10, 2022 at 8:49 a.m.

    Yes, Adam, there are many questions to be answered. But some clues are developing. For example, it's likely that the subscribers for Netflix's ad-supportd service will have to come from two sources---current Netflix subs who want to save money and non-subs who sign up because they like the deal. How many will that be? As a guess I would expect a U.S. subscriber count of about 20-25 million at the end of year one---but with a fairly high degree of churn---followed by an eventual build up to 30-40 million.

    As regards ad formatting, the likely outcome will be only pre- and post roll commercials with zapping options for many---not in show breaks. Many branding advertisers will not be happy with this.

    How will the time be sold? Most will probably be sold via computers dealing with other computers---"programmatically". There are no signs that staffs of skilled negotiators with solid network TV sales and program packaging or research experience are being formed to sell direct to the major TV time buying agencies. This will change once the desired sales goals aren't met---I assume.

    Measuremnt? Most likely Netflix---or its Microsoft sales agent---will try to impose it's own metrics on a "trust us" basis. But that's not going to fly with the major TV time buying agencies so, inevitably, it will be Nielsen's estimates of average commercial----or commercial minute---- "audience" that prevails.

    Being realistic, the first advertisers to come aboard will, no doubt be smaller local/regional marketers as well as search and direct response advertisers who pay only for clickthroughs and aren't so concerned about the overall scale of the platform's reach. However, in order to get the big bucks from major TV branding advertisers Netflix will have to grow its subscriber base to a level that is considerably larger than tht of a mid-level cable channel. How long it will take to attain this level of penetration remains to be seen.

Next story loading loading..