Netflix has nearly completed its about-face about commercials. While we now know its ad-tech partner (Microsoft) and when it will launch (“early 2023”), there’s still much we do not know about AVOD Netflix. Like, which shows (and movies) will Netflix put ads on anyway?
The short answer is most — but not all — content. “The vast majority of what people watch on Netflix we can include in the ad-supported tier — today,” the company’s Co-CEO and Chief Content Officer Ted Sarandos said on Tuesday’s Q2 earnings conference call. “We will clear some additional content — but certainly not all of it.”
Sarandos was responding to what is understood as one of Netflix’s biggest hurdles to launching commercials: Actually getting permission. It needs to renegotiate at least some contracts for third-party shows like “Breaking Bad” and also Netflix Originals that are produced by other studios. Sony makes “The Crown,” for instance. When those deals were first struck, the concept of Netflix-with-commercials sounded laughable. The new reality brings in an additional revenue stream, but it also comes at a cost: Studios are likely to demand a 15 to 30 percent premium in these renegotiations, the Wall Street Journal reported.
“It’s certainly a nice to have … but it’s not a must-have,” CFO Spencer Neumann said of the licensed content that may or may not end up on the cheaper, ad-supported tier. What’s also nice is that many third-party shows essentially syndicated from broadcast and cable TV into Netflix’s ecosystem already have built-in ad breaks, should the streamer choose to go that route.
See what was nice — and what was not-so-nice — about Netflix’s second-quarter earnings here.
OK, so we know that Netflix will probably be able to show ads on most of what it wants, but the execution remains a big question mark. Netflix could retain some semblance of the premium experience members are used to and show ads only at the beginning and end of content, or go all-in with TV-style interruptions like Hulu. Or you could just continue to pay the full monthly subscription fee to avoid ads altogether (though whether that pricepoint will be raised remains to be seen).
According to Netflix, 60 percent of the content on its balance sheet are originals, which is part of an explicit strategy to move away from licensed shows and movies. (Ampere Analysis wrote in March that more than 3,700 of Netflix’s 7,000 shows and movies are originals or exclusives; under current growth rates, 75 percent will be by the end of 2024.) There has been some speculation that the streamer won’t put ads on its biggest originals, like how HBO Max’s ad-supported tiers maintain the sanctity of HBO shows like “Euphoria” by streaming them commercial free.
“Unless they decide to throw the subscription model completely out the window, you are not necessarily going to see them put ads in the middle of ‘Bridgerton’ or ‘The Crown,’” Andrew McLean, a managing partner at Inventus Media Partners, said last week during a live-streamed conversation with UBS media analysts. “They’re probably more likely to monetize the long tail.”
“We are still in the early days of deciding how to launch a lower priced, ad-supported option and no decisions have been made,” a Netflix spokesperson told IndieWire for this story. “So this is all just speculation at this point.”
McLean was among those at the five-day Cannes Lions International Festival of Creativity 2022, where Netflix was the Belle (sorry, Disney) of the ball. Executives at the streaming giant held court, he said, asking the advertising industry what it wants from them. Well, now, what media buyers want from them and Microsoft.
Netflix announced last week that Microsoft would power its ad tech and sales efforts, a crucial ingredient to get the whole thing up and running. Microsoft’s existing architecture powers ads for Bing and other search engines — and unlike the other options Netflix was considering, like Google and Comcast, does not directly compete with the streamer in the content game.
Netflix COO Greg Peters said Microsoft will work with Netflix over the next few years to create “a new ads ecosystem around premium TV.” The goal: “incredible” experiences for users and advertisers alike, he said.
The plan is to launch ad-supported tiers in territories with mature ad markets (you can bet that includes the U.S.) and over time, build up capabilities and see more and more subscribers choose commercials. Netflix wants to keep things simple, with a similar “good, better, best” tier system that it currently offers. And eventually, Netflix is promising to blow everyone’s minds with advertising.
(Nearly) regardless of the product, AVOD Netflix provides a lifeline — both internally and externally. McLean said he expects “very, very positive” reception to both the addition of more commercial inventory into the marketplace and the “quality” of Netflix’s specific inventory. Now we just need to wait and see how much of that inventory adds ads.