Netflix Reports Q3 Bounceback, Follows Broadcast-Centric Business Models with New Ad Tier

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Just after the Wall Street market closed today, Netflix issued its Q3 earnings statement, reporting 2.4 million net new paid subscribers after two straight quarters of net subscriber losses. Shares rose 14% after the closing bell with the company's better-than-expected reported results. Netflix projected 4.5 million net new subscribers in Q4, with an anticipated boost from its new, lower-cost ads tier.

Netflix’ Basic with Ads tier will launch from November 1 in twelve countries as part of a wider development in the streaming ecosystem that will see streaming platforms engage with the metrics of linear broadcast for the first time.

“Remember that in most markets hybrid services from national broadcasters have been available for 10+ years,” comments Oscar Wall, General Manager, EMEA at subscription and billing platform Recurly. “This isn't really the case of major streaming players like Netflix and Disney+ creating something new. Rather it's about moving to an already established regional model that consumers are familiar with. This, combined with inflationary pressures, makes it likely that most streaming platforms will introduce ad-tiered models to help reduce customer churn.”

Launching cheaper services is seen as a necessary response to a cost-of-living crisis in which consumers are pulling back on discretionary investment.

Recent Accenture research revealed that 63% of consumers find it too expensive to pay for all the entertainment subscriptions they want. What’s more, AVOD revenues will grow much faster (+205%) than SVOD services (+67%) over the next five years.

The UK SVOD market has contracted by nearly one million households between January and September, according to Kantar research.

“One million households have stopped streaming,” said Dominic Sunnebo, global insight director at Kantar Worldpanel. “The reason people are cancelling is the need to save money. The most recent quarter saw two of the most anticipated releases of the year, they ranked as the top two most enjoyed pieces of subscription video-on-demand content during the period, and yet we still saw a continuation of the negative trend of the market getting smaller.”

The Netflix Ad Offer

Basic with Ads will be one of four pricing tiers. The current Basic (ads-free) plan will be upgraded to HD (720p); the most popular ‘Standard’ plan is 1080p and costs $15.49 a month; and the Premium tier is $19.99 and brings 4K (as well as download to four devices instead of two).

‘Basic with Ads’ customers will not be able to download programming initially “due to some technical complexities and how we would show ads within downloads,” explained Netflix COO and Chief Product Officer Greg Peters during a conference call. “We didn’t want to hold up the general release to implement” it.

In addition, up to 10% of Netflix library won’t be available on the Basic with Ads service, again just on debut, with licensing issues being the impediment, according to Peters.

Cutting those corners has perhaps enabled Netflix to get its ad-product into the market a month before Disney.

Assuming Netflix can deliver audiences at a cost that is acceptable to advertisers, how will their subscribers respond to advertising? It has been fiercely resisted. Reed Hastings once characterised Netflix as an ad-free zone that allows viewers to “relax” without being “exploited.”

“If the man at the top considers advertising to be a form of exploitation, then he must hope his subscribers have not been paying much attention to him,” says David Cloudsdale, founder at TV ad platform Adalyser.

About Those Ad Costs

The streamer is charging $65 CPM for serving ad impressions to 1,000 people and has reportedly insisted on a $20 million minimum spend. Netflix said it has hundreds of advertisers lined up for launch, and are “nearly sold out” of inventory.

Advertisers see a “great untapped audience” of Netflix viewers who are walled off from them,” says Brian Wieser, president of business intelligence at GroupM, the WPP-owned agency.

The ad load will average four to five minutes per hour with the spot being either 15 or 30 seconds in length. Ads will play before and during series and films. Although new release films will only have pre-rolls but titles that have been on the services for a while have the potential to have mid-rolls. There will also be tight frequency caps - a common complaint with CTV advertising.

To shore up credibility with advertisers Netflix had little choice but to join the established currencies in major markets. In the UK, measurement body Barb will report Netflix viewing every day at both a service and a programme level from launch. This means the streamer will be rated alongside commercial broadcasters like ITV and Sky as well as broadcaster VOD services.

Netflix will also join Nielsen's digital ad ratings in the US from 2023 and will eventually be part of Nielsen's rebranded measurement tool Nielsen One. Netflix has also partnered with DoubleVerify and Integral Ad Science to measure its views and traffic beginning Q1 2023.

“Both Disney+, and now Netflix’ recent decisions to join Barb should be seen as an encouraging first step towards the collaboration that advertisers and media agencies would like to see from the video industry,” Kieren Mills, Head of Broadcast at planning agency Total Media. “For several years, the advertising industry grew used to (and frustrated by) data protectionism from large media owners, which only added complexity to the overall media evaluation process.”

In the UK, broadcasters continue to account for the lion’s share of viewing in the UK. According to Barb, across 2022, broadcasters’ linear channels and on-demand services have accounted for around two-thirds of all identified viewing, while SVOD/AVOD services comprise about one-sixth of all viewing. The average daily viewing time to broadcasters’ services was 159 minutes in September 2022, and the average for SVoD/AVoD services was 36 minutes per day.

“The intrigue of discovering if there really is a goldmine of audiences, eagerly waiting to be tapped, could initially inflate CPMs,” says Cloudsdale. “However, Netflix’s welcomed move to sign up to Barb will shortcut this discovery process. Barb will enable advertisers to compare Netflix with traditional broadcasters using a consistent set of familiar audience metrics. Overlaying pricing will soon reveal a comparison of cost efficiency.”

For the first time, advertisers will have an independent view on the scale of Netflix’s event programming (The Crown, Stranger Things etc) and can make an objective comparison on the cultural significance between them and the Jewels in the Crown of the broadcaster’s schedule. Agencies will also now be able to proportion Netflix’s audience delivery in event TV series vs the more consistent programming that occupies the majority of titles on the platform.

For media agencies to effectively attribute advertising pounds across the video ecosystem, “collaboration needs to go further,” says Mills. He suggests that streaming services sign up to cross-platform advertising campaign reach and frequency measurement. In the UK, Barb’s C-Flight which measures reach and frequency across linear and BVOD, “now appearing the most frictionless route.”

Tom Harrington, head of television at Enders Analysis, worries the ad tier “will be counter to brand” for Net­flix which for a decade has prided itself as being the industry innovator.

“The ad tier will be like what everyone else has been doing for the last five years… I thought they’d have some deeply immersive, brand sponsorship, light-touch offer,” he said. “It sounds like they’re going to do pre-roll advertising and cut to ads halfway through their shows — which don’t really support ads. It might not look very good.”

Recent research suggests that more than a quarter of streamers won’t put up with adverts no matter how much money they save.

Research from WatchTVAbroad.com shows that, when streamers were asked if they’d be prepared to watch adverts in order to get a cheaper monthly subscription, 28.8% said they’d do it for any discount but 24.2% said they wouldn’t watch ads regardless of how much they saved. Nearly half (47%) said they’d consider it but it would depend on the saving.

“The cost-of-living crisis has created a nightmare for streamers and the picture seems to be deteriorating fast,” comments Jeff Richey, TV analyst at WatchTVAbroad.com. “[Streamers] provide something non-essential that is easy to cancel and subject to fierce competition. The imminent arrival of a slimmed-down Netflix subscription is likely to be just the first shot fired in a bitter price war as providers try to stem the exodus."

In parallel, the content mix of a streaming entertainment business is changing too. The winners in the streaming wars will be those companies that diversify into news, music, or sports or video games or preferably a mix of the lot, according to a Publishers Clearing House survey.

“It is glaringly clear is that having movies and TV shows are now, simply, table stakes,” stated former-cable-network-chief-turned-industry-consultant Evan Shapiro, who wrote that report. “They are not at all a differentiator: Every service has them. In streaming TV, scripted and non-fiction TV are an expensive, hit-driven, share-shift model. Consumers of all ages and incomes will sign up for them, to binge something. But if that is all you have, they will not stick around.”

Recurly’s Wall agrees: “Hitting the right price point for subscription plans is a vital and challenging task for many service providers. However, when it comes to customer retention, the Amazon Prime ‘bundling’ approach should be emulated - with entertainment bundling, exclusive offers and free next-day retail product delivery. This adds value and drives consumers to think twice before cancelling. In the end I think the streaming services that find innovative ways to bundle a range of services together, will win out.”

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