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It was July 19th when Netflix announced the plan to support an ad-tiered option. Subscribers were switching platforms, recession fears were looming, and inflation was at its peak. Fast forward to today when we are in the middle of an economic slowdown with recession standing at our doors, Netflix is ready with its primary ad-tired option which they will launch in Canada and Mexico starting November. US and UK will have to wait till the end of November to have access.

It will be offered at a price of $6.99/month. The customer will get 4 to 5 mins of ad per hour and each ad will be 15 or 30secs. Netflix beat Disney+ with their ad-tiered option which launches in December at $7.99/month.

Why are we at this junction?

Let’s rewind and understand this. Struggle for Netflix was visible from the diving stock price and decreasing subscriptions. Password sharing was exacerbating the issue. On top, customers realized OTT subscription costs are nothing less than Cable TV. Back in July, I had written Netflix is on the right path offering solution to both password share and introducing an ad-supported option.

There are other reasons why the ad-supported option makes sense for Netflix. Most people get their content from streamers. Another fact is, cable channels now have their own streaming services (like Paramount+ or Peacock). So everything old is new. The only way to convince customers to subscribe is to reduce the costs and make up for revenue with Ads.

Netflix, compared to its subscribers, has a better shot at bringing targeted ads but creating customer segments in the ad business is not easy. Netflix will have to collect a lot more data like gender, DOB, etc, which will help improve ad targeting over time.

How will the Netflix Ad model work?

Netflix will charge advertisers based on views. Netflix is planning to charge around $65 for every 1000 views of the ad and eventually go up to $80 per 1000 views. This has made Netflix one of the most expensive destinations to put an ad to. From WSJ below:

Netflix said it has forged verification partnerships with DoubleVerify Holdings Inc. and Integral Ad Science Holding Corp. to confirm the validity of views, and is working with Nielsen Holdings PLC to help advertisers measure the audiences that saw ads.

Charging such a high amount is a risk Netflix is taking. Usually, platforms newer to ads start with a lower price and then re-negotiate prices as views increase. I believe this is the right strategy considering the number of subscribers and an option for advertisers to not just put ads but work on product placement in shows, series, and movies. Brands and customers want ads that are more interactive and less interruptive.

Netflix is also looking to cap the brand spend on ads at $20M per year to ensure diversity of ads.

Is this enough to change Netflix’s Landscape?

Bare with me as I build the synopsis. Linear TV is dying. It has been losing viewers for quite some time and Reed Hastings has put, in the next 5 to 10 years Linear TV might go away. As Linear TV departs, it leaves viewers with an enormous number of choices on the streaming side. Viewers are already overwhelmed.

Costs of paid streaming are now the same as cable TV with an average American subscribing to 5 services at a time. How long before people give up streaming and stick to TikTok, Instagram, and YouTube for entertainment? Reels require an attention span of 30 seconds and you can pick them up whenever you get a minute break.

This does not mean people will stop watching movies or TV shows, the economy of TV will remain but will get limited as our minds, psychology and needs evolve. I believe the ad-supported model, for a while, will curb the subscription pruning for Netflix. However, as social media tech captures more of users’ time, it is only a matter of time, before pruning starts again.

Conclusion

This is the reason, I am advocating for some time that winners in streaming entertainment will be the ones that capture the sports fans. Apple TV, Amazon Prime, and Disney bundle are all fighting for the right audience.

Remember this:

I will conclude with one of my previous blogs on “Future of Sports Streaming” where I summed up this entire issue.

But as non-fans cut the cord the prices of these sports networks will rise. Disney will charge more prices to cable tv aggregators (like Comcast) and in turn, cable tv aggregators will charge even more to secure their margins. This provides Disney or Sinclair with a great opportunity to stream directly to the customer and generate more money.

It is a win-win. Disney and Sinclair get more subscribers at a higher price (get paid more than $10/subscriber, say $20/subscriber). Subscribers get to watch sports at a lower price ($20, which is lower than $100/month in cable cost). It’s a great future and Disney and Sinclair are already prepared for this future. To sum it up – You pay for what you watch. Both sports and non-sports fans are the winners in this case.

This is the opportunity that big tech is seeing and hence gushing towards acquiring sports rights. It is simple, as a subscriber you will flock to the service that runs your favorite sports plus more. Hence the service with more sports rights will enjoy a larger audience base.

Cheers