Is Netflix Making A Big Mistake Not Taking Advertising?

A tiered system offering cheaper content in return for advertising may appeal to many consumers concerned about rising streaming prices. Netflix maintains that it benefits from growing resistance to data capture tactics.

The question is whether competition from Disney and other media companies as well as market saturation may eventually force Netflix to accept what some see as the inevitable. JL

Kelsey Sutton reports in Ad Week:

Netflix has been unwavering in its vow not to pursue advertising. By refusing to accept advertising, some say Netflix is missing out on a big payoff. "At some point they’re going to run out of runway in terms of saturation.” Consumers have indicated an interest in sitting through ads in exchange for a lower price. 60% of current Netflix subscribers agreed it’s “fair” to watch ads in exchange for free content. Netflix’s argument against advertising is that  targeted advertising is too competitive and too risky for consumers worried about data privacy.

Netflix has been unwavering in its vow not to pursue advertising, a stance that CEO Reed Hastings reiterated during the company’s most recent investor video last week.

“There’s not easy money there,” Hastings said of trying to compete with Google, Facebook and Amazon in the targeted advertising game. “If we don’t have exposure to that, the positive side is we’re a much simpler place. We’re not integrating everybody’s data. We’re not controversial that way. We’ve got a much simpler business model, which is just focused on streaming and customer pleasure.”

In the marketing community, that simpler business model is a continued point of frustration. Eager to capture eyeballs and advertise against premium programming, marketers, media buyers and consultants have long been looking for ways to wiggle their way into premium video inventory. By shutting them out and refusing to accept advertising, some say Netflix is missing out on a big payoff.

“It is a mistake for Netflix not to consider it,” said Catherine Sullivan, the chief of investments at Omnicom Media Group North America. “It’s certainly not easy money because if it was, a lot of us wouldn’t have jobs. But from their perspective, it’s a lost opportunity. At some point they’re going to run out of runway in terms of saturation.”

That seems to be happening already, at least domestically. Netflix added just 42,000 new U.S. subscribers in the U.S. and acknowledged it is facing increased churn due to “recent price changes” and “competitive launches” domestically. (The picture is far rosier internationally, where the company added 8.3 million new subscribers, topping 161 million globally.)

Jed Meyer, the managing director of North America for the media consultancy Ebiquity, said he was “surprised” that Netflix has resisted an ad-supported tier, primarily because of the long-term interest in premium video advertising and the opportunity to grow subscribers at a lower price point.

“It’s such an opportunity for them, not just to offer something ad-supported, but to put their own spin on it,” Meyer said. “There’s such a need and a hunger, from an advertising point of view, for brand-safe premium video, and there are so many advertisers that would love to creatively work with them and do it in a tasteful way.”

Part of Netflix’s stated argument against advertising is that the risk of wading into the targeted advertising space is both too competitive and too risky for consumers worried about data privacy. However, buyers say they’d still spend big on Netflix even without extensive targeting options.

“If there was an ad-supported model that might not be as data-targeted, there would still be an appetite there,” said Diana Bernstein, svp, managing director, Havas Media. “Netflix does bring all their content to the table, and if they can bring that additional reach, that would be great for buyers and for advertisers.”

Gibbs Haljun, the total investment lead at Mindshare USA, said even simple advertising units like takeover products on Netflix’s homepage would be a welcome addition to marketers—if only Netflix were to begin offering them.

“From a creative standpoint, you don’t necessarily need data targeting to do some of these things,” Haljun said, adding that contextual ads around certain programming would also be welcome. “Advertising on those platforms would really be about building vast reach quickly.”

With ads, though, comes another risk for Netflix: measurement and metrics. The company is notoriously tight-lipped about its programming performance, and last week watered down its own internal measurement to count a view—which used to indicate that a subscriber had watched at least 70% of a movie or episode on its service—to just two minutes, raising more than a few media buyers’ eyebrows.

“What buyers are really looking for is transparency,” Bernstein said.  “What’s important to me is a brand-safe environment, transparency and measurement.”

As more eyeballs turn to streaming, some consumers have indicated an interest in sitting through ads in exchange for a lower price. According to a Jan. 23 survey from YouGov, 40% of Americans said they would somewhat or strongly consider paying a lower fee in exchange for seeing more advertisements. The same survey found 60% of current Netflix subscribers agreed it’s “fair” to watch ads in exchange for free content.

“Consumers have been trained to get content inexpensively,” said Warren Kay, chief revenue officer of the media group Nexstar Digital. “Not free—we are paying for content today—but that’s only a percentage of the market. In order to reach critical mass, I believe you have to have a few pricing options.”

Without an ad-supported tier on the service, brands and agencies have come up with other ways to break into Netflix’s ecosystem, namely through product placements and brand integrations that have become more common with some of Netflix’s original programming. Those integrations, though, require a lot of lead time and work, and often represent a one-off opportunity, said Ari Rosenfeld, the chief investment officer of GroupM’s Wavemaker.

Since buyers are already eager to put marketing dollars on premium digital video, services like NBCUniversal’s Peacock and WarnerMedia’s HBO Max are building cheap or free ad-supported tiers that executives have said will help drive growth as streaming fatigue grows. Other services, like Pluto and Tubi, offer up programming entirely for free. Hulu, which offers both ad-supported and ad-free tiers, has said that 70% of total subscriptions to the service are ad-supported.

Unsurprisingly, marketers are intrigued with the new offerings and are vocal proponents of the tiered system. “When you let the consumer make the choice, first of all, it works,” Sullivan said. “Second of all, it gives the major media companies room to rethink what an advertising model looks like.”

With that said, buyers expect Netflix to continue on as it often has. “At this point, if Netflix doesn’t want to play in that space and they’re continuing to grow subscribers, they’re not going to change,” Rosenfeld said. “As that growth level-sets or slows down, there might be opportunities to take another look at revenue through advertising.”

But he’s not holding his breath.