Netflix, Hulu, and Prime Video: The Rise of Advertising in Streaming

The first television advertisement was in June 1941.

Lasting a mere 10 seconds, it showcased a map of the United States with a superimposed watch face and 5 spoken words, “America runs on Bulova time”.

Broadcasted just before a baseball game between the Brooklyn Dodgers and the Philadelphia Phillies, Bulova made television history on what was then called WNBT-TV (now NBC).

Since then, advertising has become a dominant force in the world of television. Sports, shows, and news channels alike rely on ads for revenue and the freedom to create value for their viewers.

Over the years, media alternatives to broadcast television have evolved dramatically. From Betamax (video cassette recorder) to VHS to DVDs, each innovation was uniquely revolutionary for its time.

However, they all shared a common trait: the absence of advertisements. Whether rented or purchased, these prerecorded pieces of media offered a new way for viewers to watch their favorite movies or TV shows uninterrupted.

More than 50 years after the first television ad, Netflix was founded by Reed Hastings and Marc Randolph in 1997. Initially established as a DVD rental service, the company went on to completely disrupt Blockbuster’s business model. Since then Netflix has revolutionized how we consume media and has grown into one of the largest and most successful companies globally.

In 2007, Netflix began streaming content on the internet (get it? Net-flix). This move garnered rapid popularity as viewers embraced the newfound freedom to access their favorite movies and shows from anywhere with a mobile device.

One of the primary appeals of internet streaming upon its inception was the absence of advertisements compared to traditional television. This was made possible by Netflix’s subscription-based model, wherein customers paid a fixed monthly fee for unlimited access to the service.

The same year that Netflix began its journey into streaming, Hulu was founded. Originally conceived as a platform for viewers to watch recently broadcasted network TV shows for free with ads, Hulu eventually expanded its offerings to include subscription-based plans and more tailored options for users.

For years, Netflix maintained its reputation as an ad-free platform, offering payment plans that ensured an uninterrupted viewing experience. The only interruption viewers anticipated was the occasional “Are you still watching?” message after prolonged periods of viewing.

For a long time, this was a major selling point for the streaming service. It solidified its position as a leading platform and fueled its continued popularity.

Therefore it came as a shock to many when they introduced an ad tier to their platform in 2022.

Starting at $6.99 a month, subscribers could now join Netflix for a reduced price and with approximately 4 minutes of ads per hour. There were still 2 ad-free tiers: Standard ($15.49/month) and Premium ($22.99/month).

The rationale behind this shift, initially obscure, eventually became apparent.

Many users were not paying for their own Netflix subscriptions; instead, they relied on shared passwords from friends and family. This not only led to substantial revenue loss for Netflix but also posed challenges to sustainable company growth.

This made it big news when they announced they were cracking down and addressing password sharing. Their new policy was that multiple people could still use and share an account, but they all had to be living together.

Not unexpectedly, this caused some backlash. In response, Netflix offered a compelling alternative for those unwilling to pay full subscription prices: a heavily discounted ad-supported tier.

This strategic maneuver proved to be a stroke of business genius for the company. Since the fourth quarter of the previous year, the number of ad-supported Netflix accounts has grown 65%. These new subscribers likely comprised existing users who had previously shared accounts without paying. Netflix effectively capitalized on its existing user base to propel growth and reshape its business model.

Although Netflix has historically been adept at maintaining its existing customer base, achieving further growth has posed challenges in the face of intensifying industry competition. Attracting new customers in such a landscape proved a formidable task.

Many companies within the streaming industry have embraced advertising as a key strategy. Recently, Warner Bros. Discovery reported a significant YOY (year-over-year) increase of 51% in streaming ad revenue compared to their Q4 earnings in 2022. Others like Hulu have long used advertising as a main tenant of their business model while Amazon’s Prime Video has recently integrated ads into their standard platform, representing a big shift for the company and the industry as a whole.

Prime Video’s model differs significantly from its counterparts. As of January 29th in the US, ads have become the default viewing option, with users having the option to opt for an ad-free experience at an additional cost of $3 per month. There’s been some noticeable backlash since this change. Rather than offer a cheaper ad-supported version of their platform like Netflix has, Amazon has made ads the default for their users. Supposedly, the ad-load is much more minimal when compared to other competitors but it’s likely to differ from user to user.

For a long time, viewers opted for streaming subscriptions to avoid ads on traditional TV or other formats. However, now that these services are either running ads or introducing new ad-supported tiers, they represent a huge market for advertisers to leverage. It’s a massive opportunity to target engaged viewers with good contextual and demographic information. For example, on Hulu, advertisers can target users by gender, age, location, interests, and show genre. They can also reach audiences by any combination of state, designated marketing area (DMA), city, or zip code. With this level of targeting, ads can be relevant and effective, leading to more conversions and brand recognition.

Advertising on streaming services operates differently from other channels such as Facebook, Instagram, and TikTok. While social media platforms can achieve a huge amount of impressions, it’s difficult to stand out from the noise. It’s easy for viewers to scroll past something they’re not interested in or even click on to a different page. Alternatively, the experience of streaming a movie or show tends to be a highly engaging experience for viewers. They are interested in the content they’re watching and care about what’s being shown. This can lead to enhanced brand memory, improved recognition, and more opportunities for meaningful conversions.

Ultimately, success depends on the effectiveness of targeting. While demographics such as age and location can be leveraged, other analytical tools on streaming services are lacking, which can hinder the success of campaigns.

As of late last year, Netflix started running ads that were 10, 15, 20, 30, or 60 seconds. They also allowed advertisers to target topics such as dating, financial services, and even Netflix’s Global Top 10 list. This makes it possible to target audiences by genre and specific movies or shows that are guaranteed to have millions of viewers. At any given time, advertisers could be targeting some of the most popular content in the world. Consider a scenario where a new dating app aims to advertise on Netflix with a narrowed demographic focus. Their target audience comprises viewers aged 18-35 who watch dating shows and romantic comedies, as they are likely to respond positively to the ad. However, they need to ensure the ad creatives they make will be effective and memorable.

In this scenario, creative analysis emerges as a valuable tool. Powered by AI, this technology plays a pivotal role in deciphering the performance metrics of specific ad creatives. Creative analysis enables advertisers to refine and optimize their ads for maximum impact by analyzing user engagement, feedback, and other relevant data.

Fine-tuning the ads shown to users on platforms like Netflix, Hulu, or Prime Video becomes an essential process in ensuring that they shine amidst the content clutter and resonate deeply with the target audience. Through iterative analysis and adjustment, advertisers can enhance the impact of their ads, ultimately driving greater brand recognition and engagement.

To stand out from the crowd and run a memorable campaign the ad creatives themselves need to be extremely high quality. Knowing how to effectively place products or position text could be the difference between a failed campaign and a successful one. Creative analysis aids in recognizing which ads will connect with a target audience. It’s the process of using artificial intelligence to analyze creatives and determine which components will have a positive impact and which will not. 

Ultimately, the integration of advertising into streaming services like Netflix and Prime Video signifies a huge shift in the media landscape. Similar to the impact television advertisements had on viewer and advertiser dynamics, the introduction of ads within streaming platforms heralds a new era of interaction and engagement. In 1950, just 9% of US households had televisions; by 1959, this number had grown to 85.9%. In 2015, 52% of US households had at least one video streaming service, and by 2023, this number had increased to 83%.

Streaming is growing and offers vast potential for precise contextual targeting and authentic consumer connections. However, optimizing this opportunity requires a delicate balance between effective targeting strategies and the creation of compelling ad content. Leveraging technologies like creative analysis enables advertisers to deploy ads that resonate deeply with their intended audience and maximize the value of their ad campaigns.