Commentary

Netflix's Reality Check: Modest Goals For Ad Tier - And That's Good News

For years, TV media-buying agency executives believed that Netflix absolutely, positively would be shifting into an advertising-supported platform.

Not only that, but they believed this would rise to command most of its business -- especially in the U.S.

Fast forward to 2023. Now, after starting up an ad-supported option on November 3, we get word from a report that after nearly five months, Netflix has amassed one million monthly active ad-supported users.

Netflix still has around 74 million domestic subscribers for its full subscription no-ad option.

A Netflix representative did not comment to TV Watch with regard to this news.

Analysts are now beginning to come to the conclusion that Netflix may continue to see just modest gains for its ad-media product -- that much of its new business and/or transitioning business to an ad-supported platform will get to very modest levels.

And that’s okay.

“Analysts feared this new [ad] tier would cause many existing customers to downgrade,” writes Michael Morris, media analyst for Guggenheim Securities. “Netflix didn’t think this would happen. Netflix was right. Most of the people signing up for the ad tier are new customers or lapsed customers, not people who immediately changed plans. The ad tier now accounts for about 20% of new sign-ups in the US, per Antenna.”

Still, he says, the coming crackdown in Netflix password sharing might change the dynamics somewhat:

“The effectiveness of the ad tier is about to get a major test as Netflix cracks down on password sharing. That will force millions of people to stop using their friends’ accounts, at which point they can either quit Netflix or pay. If you are price-sensitive, the $7 version of Netflix is a lot more appealing than the $15 or $20 version.”

The truth is that much of Netflix's future growth still depends on expansion in international markets. The ad-supported option is just an alternative for the price-conscious media consumer -- not the preferred service.

Behavioral brand trends continue to deepen around Netflix -- where HBO was decades ago. That is, the Netflix ecosystem brand value is one of no commercials, no sponsorship.

If consumers need to shift out of its traditional service, it’s only because they have no choice. So this kind of second choice/kind of negative aura for that specific product, and any consumer brand -- isn’t generally good news for the long term.

In its still profitable way of operation -- and still way ahead of its competitors, Netflix would do well to go with its strengths.

One of its most popular shows right now? “Outlast.”

1 comment about "Netflix's Reality Check: Modest Goals For Ad Tier - And That's Good News".
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  1. Ed Papazian from Media Dynamics Inc, March 21, 2023 at 1:13 p.m.

    When Netflix finally decided to launch its ad-supported AVOD service we felt that it had a good opportunity to become a major player in TV time sales---although, in our opinion, the best time for this to have happened was probably four years ago, not now. A lot of people agreed with this assessment, many going all- in by claiming that the advent of Netflix's AVOD service would "revolutionize" TV time buying---and selling. Presumably this was in referrence to the targeting benefits that advertisers would garner.

    Now, it appears that many of us, ourselves at Media Dynamics Inc,. included, may have been wrong. At this plodding pace---only 1 million subscribers after four months of active solicitation---its probably time  to greatly revise our estimates of where this initiative may go in terms of scale. Unless something changes radically, it seems doubtful that Netflix's AVOD service will attain the audience  of a mid sized cable channel in the next three  years and, if so, all bets are off regarding its revenue potential, to say nothing about leading us to the promised land where targeting and other refinements are concerned.

    Maybe we wil be proven wrong again and Netflix's ad-supported service will, afrer a very, very slow start,  soar to the heigts and attain 30 million subs in the next several years. Who knows? But by then, the streaming venue may be clogged with failing or breakeven AVOD or  FAST services who also got in too late and couldn't sustain themselves in such a fragmented space.

    When TV began, there were two major networks---CBS and NBC--plus a very weak ABC and an even weaker  and short lived DuMont network and for the next thirty years only three networks ruled the roost-- at an average pre-tax profit margin of about 6%. But what would have happened if instead of three TV networks splitting the audience pie there had been 10 at the outset plus 30-40 joining in later? How many of these would have been viable business propositions? It's a question worth pondering.

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About the Author

Wayne Friedman is West Coast Editor of MediaPost. You can reach Wayne at wayne@mediapost.com.