From the moment Netflix began streaming content in 2007, the platform insisted it didn’t need advertising. It didn’t need advertising when it launched its first big-budget original program in 2013. It didn’t need advertising when it went global in 2016. It didn’t need advertising when it began losing subscribers for the first time in a decade in 2022.
Wait — scratch that. It turns out that the subscriber loss did spark a change at Netflix, and it does need advertising. After years of dominating the streaming wars, Netflix got pushed into this unprecedented territory. The blip caused by the simultaneous growth of competition and decreasing viewer interest with the waning pandemic meant Netflix was no longer as dominant as it had once been. The subscriber losses made it appear vulnerable, even though revenue continued to grow.
And so, earlier this month, in a bid to maintain the marketplace status quo as streaming’s 800-pound gorilla, Netflix introduced its first ad-support tier. For $6.99 per month, about half the regular price, subscribers can access Netflix content, paying a lower rate in exchange for watching commercials.
Will it work? And, more importantly for brands, is advertising on Netflix worth it? We spoke to some experts and looked over the format to draw our conclusions.
Why Did Netflix Add Ads?
The company apparently felt it had no choice.
CEO Reed Hastings has always been anti-advertising, and as recently as 2019, the company insisted in a statement to shareholders, “We, like HBO, are advertising free. That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”
Rolling out ads just three years later represents a significant about-face from that strong statement. Yet Hastings may not have seen an alternative. The company claims that password sharing has taken a deep bite out of its business, and it’s promised a crackdown coming soon to discourage the practice. The lower-priced ad platform offers a compromise to entice those who may have been sharing passwords to stick with the service.
Plus, Disney+ has seen considerable gains in subscribers, though Disney is bleeding money with the service. The perception that a competitor is gaining is dangerous in a streaming environment that trades on buzz. Netflix stands to gain a lot of subscribers from the ad-supported platform. Tejas Dessai, research analyst at Global X ETFs, told us he expects Netflix subscriber growth to rebound to 20 percent growth levels in 2023 thanks to advertising.
He thinks that could impact competitors, too. “Should the company execute on its plans, we expect smaller players to give up significant market share over time,” he says. “We’ve seen with internet platforms that the digital ad market tends to converge on platforms with large reach and scale. Netflix inarguably offers the highest-value audience for brands.”
How Does Netflix Advertising Work?
Basic with Ads, as the ad-supported tier is called, includes 4 to 5 minutes of total commercials per hour. Each ad lasts 15 or 30 seconds, industry standards for streaming. Viewers can’t fast-forward through the ads, but they can pause them. They air before and during shows, much like Peacock and Hulu ads.
Of course, potential implementation problems haunt any new digital launch. “There are also some technological risks given Netflix will have to build the entire ad delivery and measurement stack and launch it via third-party OEM TV sets. Long buffer time, crashes, weak ad experiences, etc., could hurt brand value,” says Dessai.
So far, though, complaints have been limited.
What Advertisers Are on Netflix?
Perhaps in keeping with its former disdain for advertising, Netflix wants to keep it classy. It has courted high-end advertisers for the launch, Dessai points out. “Advertisers that will run ads on the service include luxury brands LVMH, Moët Hennessy and Louis Vuitton, along with beauty brands L’Oréal and NYX — clearly brands that tilt toward affluent consumers and households, which is Netflix’s staple,” he says.
Without a doubt, the inventory is in demand. Netflix sold out before launch, and advertisers have been eager to scoop up newly opened inventory. The buzz and excitement should keep ad spending steady for the first few months, at least until more solid subscriber numbers are released.
What’s the CPM for Netflix Advertising?
Netflix had hoped to charge advertisers $65 for reaching 1,000 viewers, also known as a CPM. But advertisers say the actual price has been a bit lower, between $45 to $55.
Dessai believes Netflix stands to make a bundle. “Using a $35 CPM (which would be on the lower end) and an average of 60 minutes of viewing time a day per user, Netflix could generate about $9.45 in ad revenue per user per month,” he projects. He says the platform’s popularity gave it an advantage for pricing. “Netflix’s average revenue per user is significantly higher than the competition, enabling Netflix to lower prices more aggressively on the ad tier to spur growth,” Dessai notes.
Indeed, Hulu’s average CPM has been as high as $50, though it has fewer top-tier, buzzworthy shows than Netflix.
Will Netflix Advertising Work?
It’s hard to bet against a company that has ushered in previous mass-scale changes so successfully. Netflix transitioned from a DVD-by-mail rental company to a streaming-focused one, learning lessons from erstwhile competitor Blockbuster, which failed to evolve with the times. If anyone can embrace change and pull off this introduction, it’s certainly Netflix.
Is Advertising on Netflix Worth It?
We think so, for now. You will reach an audience still engaged by the novelty of early Netflix ads and curious about how they work. The CPM, if it remains on the low side, is decent for streaming content, and you reach a desirable audience. Entertainment brands and others should check it out. We can help you place the ads. Get in touch to learn more about Netflix advertising and how we can help you book it.