As Netflix dives into advertising, media buyers watch the clock

In early 2020, Netflix CEO Reed Hastings reiterated his disinterest in an ad-supported tier on Netflix, declaring that “there’s not easy money” in advertising. Three years later, and Netflix is taking the plunge into the advertising world. The service has nearly sold out of its initial ad inventory with premium rates and hundreds of brands in auto, CPG, travel, and retail.

Easy or not, there’s at least some money to be made.

But the real evaluation will begin right after the starting gun fires, media buyers and analysts told Marketing Brew, making the first few months critical for Netflix to prove whether it can compete in ad-supported streaming.

“The shiny-new-toy idea of Netflix is not going to last very long,” ​said Karen Benson, evp, director of integrated media at Deutsch NY. “They have a short rope in terms of how long they actually have before they get some of these things right.”

Switcheroo

What, exactly, does Netflix need to get right? The first is convincing enough people to sign up for its ad-supported tier. Netflix has told ad buyers it expects around 40 million people worldwide will be watching Netflix’s Basic With Ads by the third quarter of 2023, per the Wall Street Journal—nearly three times more than the 13.9 million total net subscribers the service has added in the last four quarters.

A less-expensive ad-supported tier may give price-conscious consumers a way to lower their subscription costs without canceling entirely. That could be an asset this year, when around one-fifth of US consumers said they “would like to cancel” at least one subscription streaming service, according to data from Kantar.

“People who might have otherwise turned away because of economic difficulty or increased price sensitivity because of inflation and other things that are happening right now, they’ll still be retained,” said Paul Erickson, principal at Erickson Strategy & Insights. “Some revenue is better than no revenue.”

Subscription growth could also be aided by Netflix’s impending password-sharing crackdown, which, when it rolls out in more markets in early 2023, could prompt many millions of subscribers to either pay slightly more to keep sharing or transfer profiles to separate paid accounts.

“We think that separate account path will be especially attractive in countries where we’re launching that lower-priced Basic With Ads plan,” Netflix COO and chief product officer Greg Peters told investors last month.

But growing subscribers can take time, Netflix has acknowledged to investors. “Since we’re keeping our existing plans ad-free,” the company said in a letter to shareholders this month, “it will take us time to build up our membership base and the associated ad revenue.” Slow growth out of the gate could dampen Netflix’s ability to charge premium rates for its ad inventory—especially if advertisers feel they can find better deals elsewhere.

“Ultimately, they’re not going to keep the prices high if no one is signing up,” Erickson said.

Wait for it

That all means Netflix’s day-one advertisers are in for a big test. Netflix President of Worldwide  Advertising Jeremi Gorman said there are “hundreds of advertisers” in auto, CPG, travel, retail, and luxury categories who have already signed on as advertisers; Benson said that many of those advertisers likely have deeper pockets and might not be particularly concerned about performance to start.

“These are advertisers that want to go out there and build their brands, [and] aren’t as mindful as CPMs,” Benson said. “It’s going to be the [advertisers] that are already used to paying a high CPM with very little targeting.”

Demand for Netflix ad inventory has been “very strong” leading up to the launch, Peters told investors, but buyers said that to keep that interest high, Netflix will have to prove its worth in the coming months—something that Benson said will only be accomplished with performance data.

“What metrics are they going to be able to share with me in terms of the engagement of the ads?” asked Benson. “Can they guarantee that people are actually watching them?”

Netflix has tapped a number of partners to measure advertising on its platform beginning next year, including Nielsen, which will measure audiences, and DoubleVerify and Integral Ad Science, which will measure ad impression delivery, viewability, and traffic validity, Gorman said this month.

Netflix executives have been adamant that they will not use any data collected on Netflix to profile-build or use to target ads off of Netflix. But in an ultra-competitive streaming market, some buyers said they aren’t sure how long that will last.

“If they’re going to push into this advertising space,” Benson said, “they’re going to have to give what the advertisers want.”