Netflix & Chill Ads

Netflix and Chill Ads

The Sandman © Laurence Cendrowicz & Netflix 2022.

Netflix’s new ad-led tier will attract viewers but will it also deliver for advertisers?

Having long resisted ads and closely guarded its subscriber data the SVOD must change tack to provide the transparency, tracking and targeting expected by TV ad agencies.

Netflix expects to have 4.4 million unique viewers for its new advertising-supported platform by the end of the year after launching in a dozen markets, including the UK, France, Australia and the US. It also estimates that this tier could generate USD1.9 billion in ad revenues by 2027 in Western Europe alone.

Virtually everyone agrees Netflix’s ad play will be successful. The question is whether getting into advertising changes a company which has closely guarded its own data and prided itself on forging a distinct path in the cutthroat world of entertainment. “[Netflix boss] Reed Hastings once characterised Netflix as an ad-free zone that allows viewers to relax without being exploited,” says David Cloudsdale, founder at TV ad platform Adalyser. “If the man at the top considers advertising to be a form of exploitation, then he must hope his subscribers have not been paying much attention to him.”

All major SVODs are set to offer a cheaper ad-supported tier to tap into a market of people who do not mind advertising but see existing subscription costs as excessively exorbitant. The goal is to reduce churn and increase revenues to sustain multi-billion content costs without cannibalising the existing subs base.

“The user experience can’t be radically different to that which subscribers have come to expect,” says Lindsey Clay, CEO, Thinkbox. “Netflix has a very

The Midnight Club © Eike Schroter & Netflix 2022.

NETFLIX MEANS HIGH QUALITY PROFESSIONALLY MADE TELEVISION. ITS LAUNCH IS ONLY POSITIVE IN THAT IT WILL GROW THE WHOLE TELEVISION ADVERTISING MARKET.

The Umbrella Academy © Christos Kalohoridis & Netflix 2022. steep learning curve in understanding what works best for viewers and advertisers.”

It’s a big cultural shift, she says, for a company that had explicitly set its face against the ad model.

“Advertisers expect the same standards set by the rest of the television industry – a high level of transparency, targeting and being able to track what happens plus a regulated, trusted environment in which ads are pre-cleared in the knowledge they will be aired in brand safe content.”

To shore up credibility with advertisers Netflix had little choice but to join the established currencies in major markets. In the UK, measurement body Barb report Netflix Basic with Ads views every day at both a service and a programme level. Netflix will also join Nielsen's digital ad ratings in the US and will eventually be part of Nielsen's rebranded measurement tool Nielsen One. Netflix has also partnered with DoubleVerify and Integral Ad Science to measure its views and traffic beginning Q1 2023.

“Disney+, and Netflix’ decisions to join Barb should be seen as an encouraging first step towards the collaboration that advertisers and media agencies would like to see from the video industry,” says Kieren Mills, Head of Broadcast at planning agency Total Media. “For years the ad industry grew used to – and was frustrated by – data protectionism from large media owners, which only added complexity to the overall media evaluation process.”

However, Netflix will only allow marketers to target by genre or by viewers of its most popular shows. There will be limited geographic targeting and no ability to target by gender or age or by time of day –the very metrics that television advertisers expect.

There are other challenges too. Those popular series for example are going to need to be edited for ad break insertion which, Clay points out, can be a destructive experience for the viewer if it lands at the wrong point in the drama.

While Netflix is the poster child for using customer data to build a service (for recommendations, marketing, commissions) in a sense it needs to start again and gain permission to use data to pass to advertisers. In contrast, the main commercial and pay television broadcasters have well established video players in the market with built in permissions and high quality third party data. The streamer will be exposed to comparison across the connected television market. According to Barb, broadcast television is watched in the average home for three hours and three minutes a day. SVOD / AVOD are viewed about 35 minutes in a day and 58% of that is Netflix. Extrapolating that means Netflix is watched 20 minutes a day in UK homes –decent but not huge.

The plus side is that Netflix has considerable brand cachet as the must-have streaming television service. It is using this to lever up its price. It’s charging USD65 CPM (cost per thousand views), way above the average of linear television ads (USD8-9 CPM) and double that of broadcaster VOD (i.e ITV Hub).

“Netflix will have very unique content consumption data, and the advertising industry is very conservative,” says Oscar Wall, GM at subscription and billing platform Recurly. “As such, it'll be important for Netflix to efficiently package data in buckets the ad industry understands (especially for programmatic channels). At the same time, with a global giant making its inventory available for the first time, it'll be highly sought after. Netflix has a great opportunity to charge premium rates for exclusivity.”

In ThinkBox modelling: If the ad tier adds five million homes to Netflix’s current 15 million UK subs this would only account for 1.6% of total television ad plans.

“Advertisers will want to experiment but it’s not going to be a massive scale player,” says Clay. “Netflix means high quality professionally made television. Its launch is only positive in that it will grow the whole television advertising market.”

Netflix partner in the venture is Microsoft. With Netflix’ USD105 billion valuation of September 2022 – way south of its USD300 billion market cap a year earlier – some analysts expect this foot in the door to blossom into full acquisition of the streamer. Unlike Google, Amazon and Apple, Microsoft does not have a video content service and after buying gaming company Activision could turn to Netflix next.

“THERE WILL BE LIMITED GEOGRAPHIC TARGETING AND NO ABILITY TO TARGET BY GENDER OR AGE OR BY TIME OF DAY –THE VERY METRICS THAT TV ADVERTISERS EXPECT.”