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Ads on Netflix: what to expect and what it means for the streaming industry

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Ads are coming to Netflix, perhaps even sooner than anticipated. What exactly does this mean for the streaming industry?

The Wall Street Journal reports that Netflix has moved the launch of its ad-supported subscription tier to November. Meanwhile, the Sydney Morning Herald reports that Australia is among the first countries to have ads on Netflix later this year.

Netflix first announced it would introduce a new, lower-priced subscription tier that will be ad-supported in April. This was a reversal from a company that built an on-demand, ad-free TV empire. Indeed, it wasn’t until 2020 that Netflix CEO Reed Hastings ruled out advertising on the platform, saying “you know, advertising seems easy until you get into it.”

The change followed Netflix’s first-quarter 2022 revenue report, which saw a loss of subscribers for the first time in over a decade. The addition of ads to the platform is a clear sign of an emerging period of experimentation in the streaming landscape.

How will this system work on Netflix?

It’s important to note that not every Netflix subscription tier will include advertising. The current plan is that there will be a newly introduced and cheaper subscription tier, supported by advertising, that targets the US market at around $7-9 per month as a price point. This will represent a reduction from the current cheapest plan of $9.99 per month. These prices will be tailored to the different currency markets in which Netflix operates and the existing price points in those markets.

Thus, by bringing in a hybrid advertising/subscription tier, Netflix is adopting a business model already present on other streamers like Hulu. Netflix retains this hybrid tier, meaning that while the new tier will be cheaper, it will not be free, like the ad-supported streaming available on Peacock.

Advertising presents complex new technological and business challenges for Netflix, which has not previously operated in this market. To enter this new market, Netflix has announced that advertising will be offered through a partnership with Microsoft. The partnership with Microsoft has alleviated some fears about Netflix entering a new media market and gives Netflix access to Microsoft’s extensive advertising delivery infrastructure.

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Netflix announced that original movie programming may remain ad-free for a limited period after release and that both original content and some licensed children’s content will remain ad-free. In addition to staying away from children’s advertising, which in Australia is heavily regulated by government and industry codes, Netflix is also avoiding any ad buys in cryptocurrency, political advertising and gambling.

Advertising will run around 4 minutes per hour of content – for context, Australian free-to-air commercial TV networks are limited on their main channels to 13 minutes per hour and 15 minutes per hour on multiple channels between 6am and midnight.

Netflix will also have limits on the number of times a single ad can appear for a user, and there is an expectation that ads for movie content will be delivered in a pre-roll format without interrupting the feature.

Advertising in the streaming sector

Netflix isn’t the only subscription service advertising as part of new pricing strategies. Earlier this year, Disney announced a very successful quarter from a subscriber usage perspective, up 15 million subscribers. However, losses were $300 million higher than estimated. Disney also announced that an ad-supported Disney+ subscription option will become available in December. The Wall Street Journal reported that the December timeline given by Disney is what prompted Netflix to unveil its advertising plans.

Television consumers are already historically accustomed to television advertising – in Australia, free-to-air commercial networks Seven, Nine and Ten carry advertising, public broadcaster SBS provides a limited amount of advertising, and even pay-TV provider Foxtel is supported by both subscription fees and advertising. Advertising itself is not new to the public, but it has not been present on a number of premium streaming platforms such as Netflix.

Streaming platforms like Netflix and Disney+ are looking for ways to reach new audiences and maximize their revenue from each user. Among top executives, there’s a belief that offering a cheaper tier, supported by ads, will tap into audiences who don’t mind advertising and find current subscription prices too high. There is also evidence from other streaming platforms, such as Hulu and Discovery+, which have offered subscription tiers with ads, that these tiers can generate higher average revenue per user (ARPU) than higher priced subscription tiers.

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ARPU is a metric used in the streaming industry that looks at how much money a company earns from each subscriber after deducting business costs. Having higher revenue from a subscriber can be determined by increasing subscription prices, driving subscribers to more expensive subscription tiers, reducing business costs, or adding additional revenue streams such as advertising.

For reference, in 2021, Discovery CEO David Zaslav noted that Discovery+ generated more revenue per subscriber from their cheaper, ad-supported tier than their more expensive, subscription-only tier due to advertising revenue. Zaslav commented that advertisers were keen to reach an audience that was largely unavailable through other means of television. With that in mind, Netflix and Disney are betting that their sustained levels of ads can work similarly and increase the revenue they can generate per subscriber.

Experimentation around established business strategies dominates the current streaming landscape. HBO Max, under the leadership of its newly merged parent company, Warner Bros. Discovery, is now moving to licensing content to select markets rather than streaming on its own platform. With the airing of The Lord of the Rings: The Rings of Power prequel, Amazon Prime Video is finding out whether its experiment with its most expensive $715 million TV production to date will pay off with audiences.

There are also experiments in the streaming industry in licensing strategies, show television, pricing models and more. The results of these experiments will take time.

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