Could Netflix be the Google of connected TV?

We might have seen stranger things on Netflix over the years, but advertising is definitely going to take some getting used to.

The reality of Netflix advertising started to come into view last month, when Business Insider reported that the company has begun outlining its plans to senior executives in the ad industry. According to the article, viewers won’t see ads mid-show, “at least not initially,” with pre- and post-roll advertising the most likely options.

The article also quoted “a knowledgeable adtech source” who was told by Netflix that it wanted to carry fewer ads than rival services such as Hulu (which averages 7.4 ads per show and 12 ads per hour in its original shows; 10.1 ads per show and 13.8 ads per hour in licensed shows) and HBO Max (4.4 ads per show, 9.3 ads per hour), and plans to experiment with both sponsorships and product placement opportunities.

Netflix is also said to be actively soliciting advertiser and agency feedback on what an ad-supported model might look like, and how it can improve on what is being offered by its rivals.

A leaked survey obtained by Business Insider contained questions asking how a new Netflix offering could strengthen their marketing plans; ways in which other VOD or free ad-supported TV services let them down; the challenges they think Netflix could help them solve; and if they would like to see it offer additional opportunities beyond media.

The streaming service signalled its intention to add a cheaper ad-supported tier in April as a way to entice consumers who’ve been driven away by rising subscription fees and a plethora of streaming choices. The announcement coincided with the news that Netflix lost 200,000 subscribers in the first quarter alone.

And while saying that he is against the “complexity” of advertising, Netflix’s co-CEO Reed Hastings told analysts during an earnings call, that he is a bigger fan of consumer choice. “[A]llowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense,” he said

Much of the early discussion around Netflix advertising has focused on the key U.S. market, but Canadian advertisers and media buyers are already thinking about its inevitable arrival here.

“It’s very, very appealing,” said cairns oneil strategic media principal, Sherry O’Neil, who has seen the hype surrounding many new media vehicles and opportunities over the course of her career.

Viewers tuning out commercials has been an issue for advertisers for decades, and it has been further exacerbated by the rise of the PVR and streaming services, said O’Neil. A popular service offering top-flight content and a lighter-than-usual ad load would be a huge draw for some segments of the market, she said. “If I was launching a new product—a new car, or a banking service—I’d be all over it.”

“It will sell out in a second,” added Wade Kuiken-Rogers, vice-president of business operations for GroupM’s addressable TV division, Finecast. “This will be the Google of connected TV.”

Kuiken-Rogers predicted that Canadian advertisers will likely have to wait until at least late 2023, and there will be lots to figure out—consumer demand, ad functionality, etc.—before then. The key, he said, is that any ad service prioritizes the user experience over that of the advertiser’s. “That’s the subscriber base, and if they mess that up, everything’s gone,” he said.

While early advertising will likely be pre-roll, the space at the top of the home page typically reserved for promoting new programs could also be an ad, he said. “I really don’t imagine mid-roll unless you’re going from one episode to the next,” he said.

One fundamental difference between Netflix and traditional broadcast is that shows on the latter are constructed with natural pauses where ad breaks can be inserted. “If you’re watching Ozark, there’s no break,” said Kuiken-Rogers.

When Netflix advertising does finally arrive, however, it will offer advertisers an enticing combination of significant market penetration and rich user data. “They created the algorithm on streaming and viewing behaviour, and they have years of it,” said Kuiken-Rogers. “That is going to be the richest pool of data ever.”

But Netflix has also been notoriously averse to providing ratings for its shows over the years, and advertisers and agencies would demand more transparency and accountability.  “[You’d be] buying it on goodwill, and while goodwill on Netflix would have worked 15 years ago…not today,” said O’Neil. “They need to be able to justify the price. It’s not Netflix at any cost.”

For streaming services, the shift is being necessitated by a fierce battle for content with the major media and tech companies. In a report from earlier this year, Morgan Stanley said an “insatiable need” for new content is driving the major streaming services to invest heavily.

In January, Variety reported that the world’s leading media and tech companies—a group that includes Disney, Warner Bros., Amazon and Netflix—would spend a combined US$140.5 billion on content this year. That number is expected to jump to $172 billion by 2025. Those kinds of expenditures can no longer be borne by subscription revenue alone, said O’Neil.

What’s encouraging for both the streaming services and advertisers is that rather than balking at commercials before (or during) an episode of Stranger Things, consumers seem generally receptive to the idea of paying less for a monthly subscription in exchange for watching a few commercials. (So yes to “Running Up that Hill,” and no to running up that bill.)

Last month, Disney CFO Christine McCarthy said that the company expects most of its Disney+ subscribers to eventually opt for the lower-priced ad-supported subscription it plans to introduce in the U.S. later this year. The company is basing its projections on Hulu, the streaming service it majority owns alongside Comcast.

In 2019, Disney revealed that more than two-thirds (70%) of Hulu subscribers at the time were on an ad-supported plan. Hulu accounted for $2.1 billion of the $3.5 billion in ad revenue taken in by the ad-supported streaming services in fiscal 2021.

While it seems like consumers would generally be unperturbed by ads on Netflix, its arrival won’t be welcomed by  traditional broadcasters, who have already seen revenues tumble over the past decade as ad-skipping technology, streaming services and alternative entertainment offerings like TikTok have drawn eyeballs away from the advertising that supports their business.

“It will be devastating for them,” said O’Neil, who likened Netflix to the introduction of another Olympics to the market, with none of the money flowing into the Canadian system. “It would take a ton of money out of the market,” she said. In other words, it could quite literally turn Canada’s ad market upside down.

Chris Powell