Netflix shocks the advertising world

The Netflix reveal that it will feature ads has been met with a mixture of shock, cheers and skepticism from an advertising community that has been shut out of the streaming service until now.

“I thought there was no way this was going to happen,” said Brian Wieser, global president of business intelligence at GroupM, a WPP company whose clients include Ford, Google and Unilever. “It’s so 180 of what they represented.”

With TV viewership declining, advertisers are flocking to the growing number of streaming services that include ads, including Walt Disney Co’s Hulu, Comcast’s Peacock, Fox’s Tubi and HBO Max, now owned by Warner Bros. Discovery. They are all aimed at consumers who are willing to watch a few ads in exchange for paying a low monthly fee or nothing at all.

But advertisers’ opportunities remain limited. Streaming services limit ads to a few minutes per hour to avoid disturbing viewers. Netflix, which has announced plans to create a cheaper version of its service with ads, would offer brands another opportunity to get in front of cord cutters that are no longer reachable on linear TV.

“The more ad-supported streaming options, the better for advertisers,” said Dave Campanelli, chief investment officer at Horizon Media, a media services agency that works with Corona, Geico and Capital One. .

Netflix has already allowed marketing in the form of product placement in shows. But a cheaper service with ad breaks would be new. Whether advertisers adopt it depends on the details.

“I think there are still a lot of unanswered questions,” said Michael Law, US CEO of advertising agency Carat, which lists General Motors, Intel and Procter & Gamble as clients on its website. These include how much viewer data Netflix is ​​willing to share, how the company measures its viewership and how many people sign up for the ad-supported version, he said.

Complications

Netflix’s practice of releasing all episodes of a season at once could also complicate its advertising business, Wieser said. Advertisers typically secure TV ads months in advance, but they can also buy mid-season spots if a show suddenly becomes popular. Netflix might insert ads into shows that suddenly become part of the cultural zeitgeist, but that may be too late for advertisers.

“Most of the viewing probably would have happened before an advertiser decided to create a campaign around the program,” Wieser said. “It may be easier to do this when a program runs on a conventional multi-month schedule.”

For Netflix, selling ads will require a mindset shift. After years of focusing on acquiring subscribers and keeping them from leaving, Netflix will also have to please advertisers, said Dave Morgan, CEO of Simulmedia, which helps marketers place their ads more accurately. . It lists Walt Disney Co, Choice Hotels International and Expedia Group as customers.

“They’ll need more than binge-watching subscribers, they’ll need viewers who watch ad-supported programs every day,” Morgan said.

Media consultant Brad Adgate wasn’t surprised that Netflix embraced the ads. The company needed another revenue stream given its large investment in programming and slowing subscriber growth, he said.

Netflix co-CEO Reed Hastings said advertising review plans came after Netflix announced a loss of 200,000 customers in the first quarter on Tuesday – the first drop in a decade – and forecast a down two million this quarter, causing its stock to plunge. The company will work on creating an ad-supported version of the service over the next two years.

“Based on the dismal outlook on their subscriber numbers,” the ad-supported tier announcement “diverted some of the negative news,” Adgate said. “It became the lede.”

Hulu generated $3 billion in ads last year, with about 88% of subscribers choosing an ad-supported plan, notes Michael Morris, analyst at Guggenheim Partners. He estimates that ads could contribute $4 billion to Netflix’s profits by 2030. — Gerry Smith and Carly Wanna, (c) 2022 Bloomberg LP

Marilyn J. Hernandez