How Do You Like Your Netflix? Basic with Ads, Please
Learn the pros and cons of Netflix’s strategy to roll out an advertising based subscription model.
As Netflix faces increased competition and revenue challenges, it has introduced a cheaper subscription plan with ads. Kateryna Novatska, head of marketing at Epom, delves into the changing CTV landscape, Netflix’s decision, and the implications for advertisers.
With a vast library of content and a user-friendly interface, Netflix remains the most popular streaming service in the United States.
However, since 2021, the company has experienced a slight decrease in revenue and subscribers due to competition from other CTV players, such as Disney+, Hulu, and Amazon Prime, as well as the increasing price of its services. And although the company saw improved subscriber numbers by the end of 2022, its income continued to shrink, resulting in a 12% decline from the previous year.
To counteract this, Netflix introduced several revisions, including the notable, cheaper subscription plan with ads late last year. However it’s too early to judge, but it appears that both brands and users like this approach.
The State of CTV Ads
The US has over 230 million CTV users, constituting almost 68% of the population. And as these figures continue to rise, so does the number of allocated ad budgets. CTV ad spending in the US is expected to exceed $26 billion in 2023, a 27.2% increase from 2022.
Despite this growth, marketers still allocate more ad budgets for traditional linear TV as they perceive OTT and CTV as fragmented landscapes. However, US CTV ad spending is expected to surpass linear TV ad spending by the end of 2024 by 50.0%. This is especially interesting considering that in 2019 eMarketer forecasted that by 2024 CTV ad spending would be 1/10 of the linear.
Aside from the apparent benefits of CTV ads, such as reach, targeting, cookieless environments, precise measurements, and reporting, another advantage is their outstanding ad viewability: the global viewability rate of CTV ads stood at 93.2% in 2022. Adding to the success of CTV advertising, industry research by Magnite shows that 23% of viewers purchase after watching an ad.
See More: Why Dirty Data is Leading to Advertising Waste and How to Stop It
Key CTV Players in the US
As well as creating engaging content, OTT services provide viewers with targeted ads. By 2023, subscription-based OTT video advertising spending will reach almost $10 billion, representing 3.4% of all digital advertising and 10.2% of all video advertising.
The top subscription-based streaming services in US households are Netflix, Amazon Prime, Hulu, Disney+, and HBO Max. Netflix dominates with 74 million subscribers in the US and Canada and 230 million subscribers globally.
Netflix also remains number one regarding actual CTV hours streamed, with a 29% share in Q1 of 2022, followed by YouTube with a 21% share and Hulu with a 12% share. While YouTube is not a subscription-based service, it is here to give context. LightShed said Hulu is second only to YouTube in terms of just ad-supported services.
In 2022, Hulu brought in about $3 billion in advertising revenue, while platforms like Pluto and Tubi, which offer subscription-free ads-only content, brought in only $1 billion. This gives a sense of Netflix’s prospects in this field. It is predicted to have a potential $4 billion-plus advertising revenue opportunity in the US, thanks to a leading position in terms of hours spent on CTV viewing.
The Future of Netflix with Ads
For a long time, Netflix maintained a strict ad-free policy, but due to increasing challenges and competition, Netflix combined the perks of both worlds, mixing ads with subscriptions. And it has more numbers to support this decision: 64% of CTV viewers prefer ads to more expensive subscriptions, not just for cost reasons but because data-driven CTV ads are relevant.
The ‘Basic with Ads’ plan comes at $6.99 plus up to 5 minutes of ads/hour and doesn’t have the download option. To compare, a Basic subscription plan costs $9.99, does not have ads, and lets you download programs. Currently, Netflix’s ‘Basic with Ads’ plan has been introduced in 12 countries, including the US, but the plan is to spread it across all markets.
As the top streaming service in the US, Netflix is a tidbit for brands. According to the company’s president of worldwide advertising, Jeremi Gorman, Netflix has seen “overwhelming interest” from hundreds of global advertisers and has nearly sold out its ad inventory for launch.
In the first month after introducing ‘Basic with Ads,’ about 9% of new subscribers, or 0.2% of total US subscribers, went for it. In January, it is said that these figures doubled. By the end of Q1, Netflix expects the subscribers for the ‘Basic with Ads’ plan to come to 1.75 million, constituting around 2.5% of the total North American subscribers base.
See More: Why It’s Time To Prioritize Sustainable Advertising
Why Netflix Ads Make Sense for Brands [Or Don’t]
According to a study published in the Personality and Social Psychology Bulletin, most people, 78% to be exact, prefer to hear the bad news first. So, here are the 3 cons of advertising on Netflix:
1. Tracking and Targeting: Currently, there is no third-party measurement partner at the outset, which limits both tracking and targeting a result. Currently, Netflix only allows tracking impressions and targeting by country and program genre. Still, it plans to add more precise parameters such as age, gender, time of day, and content rating soon.
2. Price: Netflix is selling its ad slots through Microsoft’s Xandr unit for around $55-$60 per 1000 impressions (CPM), which is pricier than competitors but cheaper than initially predicted.
3. Limited Growth: Some advertisers who invested in Netflix in Q4 fell short of 20% of the promised reach, but any unused money was returned to clients.
The platform has yet to be initially tailored for advertising activities, but they are actively improving this aspect of their product. The enormity of the channel and its dominance in virtually every CTV category will likely outweigh any temporary shortcomings of the platform.
Here are the 4 pros of advertising on Netflix:
1. Reach. Undeniably, Netflix has been the most popular streaming service for almost two decades. The reach of the audiences it can provide advertisers is very compelling.
2. High Demand: As mentioned earlier, in the first month, 9% of new US subscribers went for the ‘Basic with Ads’ plan, which doubled in January and is expected to reach 1.75 million subscribers by the end of Q1, comprising 2.5% of the North American subscriber base.
3. Fast Development: Netflix plans to enhance targeting options and work with Integral Ad Science and DoubleVerify to verify traffic and ad impressions while collaborating with Nielsen on the Digital Ad Ratings product to measure audiences more effectively.
4. Nice Ad Neighborhood: Brands from Louis Vuitton and Beats by Dre to Subway and Google are among those currently advertising on Netflix, paving the way for the future of Netflix advertising.
Key Takeaways
After being ad-free for over two decades, Netflix has finally added advertising to its business model. It is yet too early to strike a balance, but it seems like this might be a way to improve Netflix’s drawbacks. While the ad business is new to Netflix, there are already far more pros than cons to advertising with them. So, you might just get to promote your Halloween product collection with the next season of ‘Wednesday.’
How do you think the ad-based subscription models will revolutionize CTV advertising? Share with us on Facebook, Twitter, and LinkedIn. We’d love to hear from you!
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