Could Netflix Go AVOD?
Ads may be Netflix’s secret weapon in the streaming wars, allowing the World’s largest subscription service to leverage their immense user data and create one of the highest value platforms in advertising.
With Apple, Disney and more vying for the streaming throne, Netflix needs to reexamine one of its core principles; will they embrace ads, the very thing the streaming service once swore to destroy, in order to remain on top? A vital question made even more pivotal when considering the scope of the opportunity that ads represent. With the ability to parse out their 149 million subscribers into segments based on proprietary demo- and psychographic data, Netflix owns an extremely captivated audience, unparalleled user data, and powerful targeting abilities. Such valuable ad inventory could easily fetch sky high CPM’s and fill rates that rival those of traditional broadcast, representing a significant new revenue source. In the previous decade, Netflix’s innovations ushered in the current era of streaming video and consumer-facing subscription services. Netflix’s growth has been fueled by the simple promise to their users; No Commercials. That powerful oath enabled a DVD’s-by-mail company to flourish into the market maker for the massive streaming video industry. Their uninterrupted ad-free experience, antithetical to cable, nurtured a culture of binge-watching – providing extreme value to users for pennies a day. This frictionless experience brought subscribers, expanding Netflix’s content budget, in turn attracting more users; a virtuous cycle that continues to this day. But with an increase in competition siphoning off customers and simultaneously pushing Netflix’s ballooning content costs, growth for the company may have to come from new revenue sources outside of subscriptions.
The high profile launch of new streaming services the likes of Apple TV Plus, Disney Plus, NBC and countless others are a monumental threat to Netflix’s sustained growth. The company is now facing a battle brought on by a philosophical shift amongst networks – why license your content to build someone else’s brand? It is a poorly kept secret that despite the very public success of Netflix originals, the most watched content on the platform has always been produced by other studios and networks. Many content owners have come to regret the hand they had in building the very Netflix Empire that now threatens their position in the market. The mercenary mindset for deploying content has vanished. Networks are now reneging valuable assets from Netflix’s clutches to distribute exclusively on their competing offerings. As the pool of licensable content dries up, and competition increases from all sides, Netflix is being forced to spend an increasing number of billions on original content. With an ever-growing budget potentially outpacing monthly subscription growth, Netflix needs to find new revenue opportunities, even if that means reconsidering their rigid no commercials policy.
Advertising is no longer a dirty word for consumers when paired with a choice. Unlike on cable, streaming has introduced flexibility around monetization models, presenting viewers with the option to watch on platforms that monetize with only ads, only subscriptions, or a hybrid. For many of the streaming services competing with Netflix, advertisements have been a major boon for growth. A standout example, Hulu, offers tiered subscriptions, with varied pricing that determine the frequency of ads shown to users. Currently, 70% of their 82 million viewers prefer paying less for an experience that includes some ads, rather than splurging for the premium subscription that eliminates them entirely. Hulu has also managed to keep users satisfied with their ads by developing new, less intrusive units, such as 10-second mid-rolls and banner ads that display while content is paused. This willingness to tolerate advertisements in one form or another in return for a discounted price is part of a sea change amongst consumer’s preferences. It is a win-win for both parties, as ads keep prices lower for the user while increasing revenue and widening the pool of potential subscribers for the streaming service.
Netflix’s hesitation to act on the opportunity ads represent is understandable. Subscription revenue is their bread and butter and anything to upset subscribers could wipe out millions of users overnight. However, Netflix can manage to have their cake and eat it too if they implement ads the right way. The streaming service has already dipped their toe into the promotional pool, selling product placements in originals and licensing their popular brands and characters for product tie-ins. Both are safe bets that don’t have as significant of an impact on user experience as commercials do. Thus far Netflix’s only experimentation with true commercials came as post-roll ads (what they called video promotions) for their own content that were widely met with public outrage. In this case, Netflix neglected to give viewers a choice, fueling fears that the floodgates for commercials of all types were about to slam open. Commercials will only work on the platform if users can control their ad experience based on what they pay. That could mean replicating Hulu’s tiered subscriptions or innovating on that model. So long as subscribers can select the ratio between the price they pay and frequency of ads, blowback and churn should be mitigated or non-existent.
At Netflix, compromising on their no commercials pledge is going to be a necessary step. They may have won the first streaming World War, but Streaming WW2 is coming, and the enemies have deeper pockets this time. The untapped potential of selling advertisers access to Netflix’s users is immense. For years Netflix has collected a wide range of data around users to develop an intricate understanding that fuels their recommendations and content strategy. Applying that rich data to deliver ads would turn Netflix into one of the most valuable ad platforms. The level of targeting possible would drive marketers into a full-fledged frenzy. For Netflix to become the next 100 billion dollar company they have to think beyond subscriptions and look to advertising as the apparent next step in staving off the competitors biting at their heels. The largest consumer subscription service can also become one of the World’s largest ad platforms; only if Netflix can break a promise.
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