This question has been the center of debate for some time now. Earlier in the year, Netflix announced it would be increasing its service price, and customers expressed their dissatisfaction. As a result, the company has experienced a decline in Q1 subscribers and expects subscribers to decline even further by approximately 2 million in Q2. Specific to North America, Netflix saw a combined net loss of 600,000 paying subscribers.
With new streaming services, such as Disney+ and HBO Max, Netflix will have to be cautious about any future price hikes to avoid a further decline in subscribers worldwide. This being noted, Netflix must now consider consumer choice with the reality of expecting in-feed advertisements, ultimately lowering the subscription cost. Implementing advertising on the platform entails that Netflix will add low prices over the next couple of years while transforming the platform into becoming ad-supported. By doing so, Netflix will be able to avoid an even further decline in user subscriptions and overall expand its user base around the globe.
Netflix will not be the first player in the TV industry to execute advertising on its streaming service. Since 2007, Hulu, Disney’s subsidiary, has been showing its users ads, and still, their service has been subscribed to by nearly half of all connected TV households within the United States in 2021. Currently, Hulu’s prices are as follows: Ad-supported at $6.99 and Ad-free at $12.99. Their ad-free choice is $3 less than Netflix’s premium service, priced at $19.99. Major competitors, such as Disney (Disney+) and HBO (HBO Max), have ads within their platforms.
Netflix has always been the most successful subscription streaming service, regardless of never relying on advertising. Unlike other traditional streaming services, Netflix has never implemented the traditional advertising structure, most commonly a 30-second ad for users to come across before proceeding to their chosen film or tv show. Thus, Netflix has the power to alter the entire tv ecosystem moving forward.
To keep their users engaged, Netflix must employ algorithms tailored to each user's likes and interests based on their watch history, online habits, etc. In other words, data must be the driving factor in Netflix's advertising techniques. Like most online platforms, data generation and collection have always been the key to enabling those connections between the users and the given platform. To engage existing subscribers and attract new ones, Netflix's ad-supported platform should be an interactive and essentially an engaging experience for each user, created by data-driven decisions.
Like other streaming services, Netflix's new source of revenue will be a combination of both subscription and ad-supported models. The CEO and co-founder of Trade Desk, Jeff Green, added commentary on the subject, predicting that advertisers will spend more on ad-supported streaming platforms, like Netflix, rather than user-generated content platforms, like Youtube. Both consumers and advertisers will benefit from Netflix's channel of advertising. The consumer will be given more flexibility in their expenses toward streaming services. Meanwhile, advertisers will be able to tap into larger audiences through the most extensive video ecosystem.
Currently, Netflix's leading platform for advertising is through their social channels, in which they sponsor posts. Their social media content ranges on Facebook, Instagram, and Twitter platforms. These posts vary differently across the world, based on apparent demographic discrepancies. By splitting the content by region, they can target audiences with content that is relevant to them. Netflix mainly creates carousels to generate engagement and increase their likes and following counts. On the other hand, Netflix uses Twitter as their own personal meme platform curated to promote their content.
With an ad-supported platform, Netflix will have to reinvent its ways of creative advertising. In slower-paced economies, such as African continents and parts of Asia, Netflix could consider implementing traditional ad spaces and operate on a FAST model (Free ad-supported linear streaming TV). This term implies free television channels financed by advertising on the Internet. Netflix could also consider a lower price AVOD (advertising-based Video on Demand), considering the majority of subscribers in these areas will unlikely be able to afford the more expensive subscription option. AVOD is free to consumers; however, they are forced to sit through advertisements before continuing on to their desired video.
However, Netflix's ad-supported platform will look a little different in more affluent countries, such as the United States, Canada, and Europe. It will most likely not follow traditional in-platform advertising techniques but will enforce sponsorships and ads presented to users pre and post-roll.
Advertising on Netflix can also increase its average revenue per user (ARPU). According to Netflix's Q4 2021 earnings, their ARPU (Average Revenue Per User) in the United States and Canada was $14.82, solely based on subscription revenue earnings. Another streaming service, named Roku, reached an ARPU of $41.03 showcased from their fourth quarter in 2021. This is quite impressive, considering their active account count stands at fewer than half of Netflix's.
Exploring an ad-supported route seems inevitable at this point if Netflix hopes to remain the number one streaming service. If they do succeed in their rollout of transforming their platform into an ad-supported one, they will most likely be able to increase their margins and generate revenue from a larger audience for the long term.
As Netflix is identified as an OTT (over-the-top) media service provided directly to viewers via the Internet, it will need to implement OTT advertising. OTT advertising is quite similar to traditional television ads; however, they are delivered to consumers strictly through OTT platforms. If Netflix enables marketers to advertise on their platforms, they can reduce the cost of their subscriptions for their users. Advertisers can advertise their products through specific geographic areas and demographics on OTT platforms, which is not achievable in traditional television advertising.
At this point, OTT is the only reasonable alternative for advertisers who previously marketed their products or services through traditional television ads. People are increasingly starting to steer away from premium channels and instead access the channels they are interested in through one of many OTT platforms.
Although Netflix's decision to become an ad-supported platform will present consumer choice, opportunities for advertisers, and generate revenue for the media giant, will it harm its reputation and decrease customer retention?
Will Netflix discover a savvy way to allow advertisers to advertise on their platforms? Perhaps through product placement in their original series?
Who knows? We guess we'll just have to sit back and watch.