Netflix Reverses Course on Introducing Ads to the Streaming Service

The advertising industry is abuzz after Netflix announced the company is open to exploring a lower-priced ad-supported tier, making the streaming giant the latest in a string of media companies to unveil similar AVOD plans. 

The news that Netflix is considering an ad-supported tier came after it posted a significant subscriber loss (200,000) for the first quarter and said it expects to lose another two million subscribers in the spring. Netflix shares fell 35 percent on Wednesday as a result, a stock market decline that seeped over to affect media rivals Roku and Paramount Global, to name a few. During the earnings call, Netflix co-CEO Reed Hastings blamed subscriber losses on increased competition from rival streaming platforms, while citing that more than 100 million households are sharing passwords without paying for additional accounts. To remain competitive, Netflix co-CEO Reed Hastings said the company is looking to “convert password sharers to payers” and will explore a lower-priced ad-supported subscription tier. 

Already, analysts estimate the company will generate billions of dollars in ad revenue when an ad-supported Netflix tier rolls out, as for years advertisers have been eager for the opportunity to reach target audiences across Netflix’s more than 220 million subscribers worldwide. As cable TV viewership wanes, streaming platforms stand to gain, with recent announcements for AVOD plans for Disney+ and WarnerBros. Discovery’s HBOMax making headlines.

Related: PMG on Why Streaming Platforms are Leaning into AVOD Plans and Live Sports Deals

For years, Netflix touted that the absence of ads upleveled the content experience for viewers, but with rival services Peacock and Disney+ moving to launch ad-supported subscription tiers, subscriber adoption rates show that a premium experience is maintainable with ads, and in some cases, preferred by subscribers who don’t want to pay a premium for streaming subscriptions. Earlier this year, free streaming service Tubi and parent company Fox dubbed 2022 the “biggest year yet for AVOD,” reporting that AVOD services will surpass subscription video-on-demand (SVOD) as the preferred streaming option, closing the five percent gap between the two offerings. Insider Intelligence expects the number of U.S. AVOD viewers to increase from 127.7 million in 2021 to 164 million by 2025 but notes that many viewers utilize a mix of AVOD and SVOD subscriptions to watch their favorite TV shows and movies. 

Regardless of individual user preferences, it’s clear that viewers are re-evaluating their subscription costs. Just this week, Morning Brew reported that “35 percent of Americans have canceled a monthly subscription in the past six months due to inflation,” and 36 percent of respondents say they will cancel a subscription if higher prices exist. While subscription fatigue is nothing new, a host of factors, including the return to in-person events and experiences, inflation, and market saturation, could spell trouble for the streaming market. Recent news that Warner Bros. Discovery will shutter CNN+ merely a month after its launch (and a $300 million investment) due to “strategic misalignment” is indicative of this larger trend. Said best in the internal note from incoming CNN head Chris Licht to staff, “In a complex streaming market, consumers want simplicity and an all-in service, which provides a better experience and more value than stand-alone offerings.” 

As subscriber growth slows and competition increases for Netflix, co-CEO Reed Hastings shared limited details on what an ad-supported tier could look like for Netflix, though a few specifics are worth taking note of: 

Netflix said it could take 1-2 years to implement an AVOD model,

The streaming giant will look to partner with an ad technology partner rather than building out its own software, with special attention paid to targeting and user privacy.

“Netflix is one of the last hold-outs for adopting an AVOD subscription model, and I’m surprised it’s taken this long for it to be up for consideration,” said Kia Igel, brand media supervisor at PMG. “Netflix is a huge platform with an expansive content library that boasts massive reach, and brand advertisers are more than ready to add Netflix to their media mix.” 

Some bullish analysts predict U.S. AVOD ad spending could nearly triple from last year’s $8 billion to $22 billion this year, a figure that will surely skyrocket if Netflix introduced an AVOD offering in the years to come. Similar to the rollout of Peacock a few years ago, any AVOD offering on Netflix will likely be open to a small selection of brand advertisers at the start, and soon be made available to more brands down the line. If competitor AVOD adoption models are indicative of Netflix’s future strategy, the ad load will probably be comparatively light to the cable TV ad model to help maintain Netflix’s premium content experience. With the 2022 Upfronts just a few weeks away, we’re sure to see even more developments across the streaming landscape as advertisers and platforms react to the possibility that Netflix will enter the AVOD market in the near future.