What it Means that Netflix is Incorporating Ads into their Subscription Tiers

In an April 2022 earnings call, Netflix co-founder and co-CEO Reed Hastings surprised longtime followers of the company when he said that he was “quite open to offering even lower prices with advertising, as a consumer choice.” At that time, Netflix committed to introducing a new lower priced ad-supported subscription plan for consumers, in addition to their existing ads-free basic, standard and premium plans.

This announcement came on the heels of Netflix’s first quarter of losing subscribers — 200,000 subscribers fewer in Q12022 than Q42021. While this loss is small in the context of their approximately 222 million total subscriber base, it did force the company to reconsider their POV regarding ad-supported offerings.

As Hastings himself acknowledged “…those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription. But as much I’m a fan of that, I’m a bigger fan of consumer choice.”

When I first started studying subscriptions over 20 years ago, I believed that an organization had to choose between subscription or advertising revenue.

was based on the subscriber being happy enough with the content to pay for it. Ad revenue was based on attracting the eyeballs the advertiser was willing to pay for.

Content about breaking news or Kim Kardashian’s outfit at the Met Gala could drive eyeballs — good for advertisers — but most people probably wouldn’t pay for that content. In contrast, an in-depth piece about an arcane change in bond regulations might only be of interest to a small group of people, but those people might be willing to pay dearly for that information and insight.

I worried that content teams would struggle to create content that worked for both models.

Much of my thinking on subscriptions was influenced by Hastings’ approach to subscriptions at Netflix. I have always considered Netflix to be a leader in the Membership Economy and admire Hastings for his commitment to simplicity, transparency and customer-centricity. I still admire him.

And I have been coming around to the same idea — that there may be room for an advertising tier alongside the existing ad-free subscriptions.

I have seen how a content team can improve content based on what they learn from subscriber behavior. When an organization understands what subscribers value and why, the organization can apply that learning to provide greater insights and value to advertisers. Advertisers can then use these insights to create more targeted, appealing and useful content for prospective buyers. In other words, it can be a virtuous cycle.

The traditional advertising experience is outdated and flawed. Forcing viewers to sit through ads in order to access desirable content often doesn’t deliver the advertiser’s hoped-for results. Suzi Watford, who until recently was EVP Consumer at Dow Jones & the WSJ sees massive room for innovation among content-based advertisers. She says “ It would be lovely to see someone create a new ad experience — one that delights customers and has some innovation around it — rather than annoying low rent interstitials

Even with a traditional advertising experience, there are likely many viewers who would prefer to pay in time and eyeballs than in hard currency. There is incremental revenue to be had, and subscribers to be saved with an ad-driven freemium model, particularly among more price sensitive and cash constrained consumers around the world, and especially during the current chaotic inflation.

Netflix is committed to exploring innovative ways to rethink advertising and create greater value for both the advertisers and the viewers, building on their subscription expertise. They have indicated they are open to multiple partnerships and to learning from cutting edge players in the digital advertising space. They’ve already announced they will be partnering with Microsoft to deliver the ads, with COO Greg Peters citing Microsoft’s “flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members.”

Microsoft apparently beat out top contenders Google and NBCUniversal to win the partnership. Having worked with Microsoft in this “Satya Nadella era”, I can attest to the company’s obsession with protecting member rights, as well as their ability to innovate. Microsoft is a great company an, observes Lucy Kueng, Senior Research Fellow at the Reuters Institute for the Study of Journalism, Oxford University “Microsoft will be hugely invested in ensuring this works out for both parties and cements its move into entertainment sector.

I was surprised at first that Google didn’t win this one. But as INMA’s Greg Piechota points out “Google is a digital advertising market leader and Microsoft/Xandr is a challenger. The challenger needs this deal more than the leader, so it likely offered better terms. Per the official release, Microsoft/Xandr promised to adapt the service to meet Netflix’ requirements in areas such as privacy, product and sales, and that again is what challengers are more likely to offer, as they have less existing business at risk than the market leaders.”

I’m still not a fan of ad-driven content, as ad-driven content is optimized for advertisers and not necessarily for the audience. But I see room for advertising in the Netflix ecosystem, even if I’m not the target audience. And I’m curious about what kind of innovation is possible, and what Netflix and Microsoft are going to come up with. There’s plenty of room for improvement. I will be watching this ad-supported tier with great anticipation.

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Robbie K Baxter

Author of THE FOREVER TRANSACTION & THE MEMBERSHIP ECONOMY; Leading expert on membership models and subscription pricing.