Netflix mulls ad-supported plans: Why embracing ads is inevitable for OTT players

Netflix is now open to offering lower-priced ad-supported plans after years of pushing back on ads on its platform. Co-CEO Reed Hastings, who has long been opposed to including commercials on Netflix, said during its recent earnings call that having a cheaper option for consumers would "make a lot of sense". 

"Those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription," he said. "But as much as I'm a fan of that, I'm a fan of consumer choice," Hastings said, adding:

Allowing consumers who would like to have a lower price and are ad tolerant get what they want makes a lot of sense.

The ad-supported plans will most likely roll out over the next year or two, and Hastings explained that this is not a short term fix as once Netflix starts offering a lower price plan with ads some consumers might be more inclined towards the offering. "It's pretty clear that it's working for Hulu. Disney's doing it, HBO did it. I don't think we have a lot of doubt that it works," he said, adding that the ad-supported plans will be a planned layer similar to Hulu's. At the same time, consumers who want ad-free viewing will still be able to have that experience. 

Netflix recently reported a loss of 200,000 subscribers and according to CNBC, this was its first dip in paid subscribers in over a decade. It shares dipped more than 25% in extended hours following the earnings report, CNBC said. At the same time, streaming stocks for Disney, Spotify, and Roku also dropped in the after-hours market following Netflix's update. Netflix is also forecasting a two million dip in global paid subscribers for the second quarter of 2022. The streaming platform previously lost subscribers in October 2011, CNBC said.

In a recent letter to shareholders, Netflix said that its revenue growth "has slowed considerably". "Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration - when including the large number of households sharing accounts combined with competition, is creating revenue growth headwinds," the company said. According to Netflix, the big COVID-19 boost to streaming also obscured the picture until recently.

On this end, Hastings said Netflix is working on monetisation strategies when it comes to account sharing. Hastings also shared that the matter of account sharing has been on the company's mind for several years but wasn't a priority when Netflix was growing fast. "Now we are working super hard on it. There are already over 100 million households that already are choosing to be on Netflix. We just got to get paid to some degree for them," he said. 

In Asia Pacific, as of Q2 2022, Netflix has 33.72 million paid subscribers. Aside from Disney+, other OTT platforms such as iQiyi and Viu have also gotten an early start by offering consumers the choice of watching shows with or without ads. What also makes Asia interesting is its receptiveness to ad supported platforms, said a recent study by The Trade Desk titled "The Future of TV 2022". More specifically, younger Millennials (94%), females (90%) and Gen Z (89%) OTT viewers are most likely to accept two or more ads per hour of free content.

In fact, in Southeast Asia, 88% of OTT viewers are actually open to seeing ads in exchange for free content. Around 89% of consumers are willing to watch two or more ads per hour of free content, said The Trade Desk study.

In fact, The Trade Desk has long predicted that subscription CTV and OTT services such as Netflix would start to offer ad-supported tiers. In a conversation with MARKETING-INTERACTIVE,  Mitch Waters, SVP of Southeast Asia, India, Australia and New Zealand said that this is because the market for new subscribers is too competitive, and the "arms race for great content" is too expensive. "The market for premium content is expanding rapidly and consumers now have lots of choices. Viewers can either watch ads to access free content or pay more for no ads," he said. Moreover, most OTT services that have done well in a price-sensitive region such as Southeast Asia offer both options, pointing to the fact that consumers here are generally price-conscious and want more choices with that in mind.

"This move by Netflix is an exciting one for brands competing for the limited attention of consumers. The fact that Netflix and Disney+ are moving towards an ad-supported model is proof that OTT has established itself as a credible channel, and I anticipate more brands will be keen to learn about running campaigns on OTT further this announcement," Waters said, adding:

More importantly, with more ad-supported services, we’ll see a shift over the next five years — brands will spend first on premium content platforms instead of the user-enerated content platforms of YouTube and social.

Similarly, Vijay Anand Kunduri, regional VP, OTT/CTV, Asia Pacific at PubMatic, said there is room for both subscription video on demand (SVOD) and advertising-based video on demand (AVOD), especially in price-sensitive markets such as Asia. Emarketer predicted last year that subscription OTT video service users will surpass a billion in 2021 - a year earlier than expected. Also, of the almost two billion digital video viewers in 2021, 53.1% were predicted to be subscription OTT video service users.

At the same time, broadcasters are leveling up the tricks, luring viewers towards their own paid video streaming services by adopting the "first on OTT" formula. Controversially, HBO GO, for example, implemented a new premiere strategy last year that now sees blockbusters from Warner Bros being available on the platform as early as 45 days after their in-market theatrical premiere in Southeast Asia, Taiwan and Hong Kong.

In line with all of these market dynamics, Kunduri said plenty of premium OTT platforms now have a "freemium" model. Broadcasters including Channel Nine and Network 10 in Australia and TV Tokyo in Japan also offer ad-supported streaming catch up, adding on to the proliferation of advertising-based video on demand OTT platforms.

Facilitating a seamless viewer experience will go a long way in helping OTT players find the right balance between SVOD and AVOD, Kunduri said. According to him, while OTT offers advertisers all the benefits of TV with the granularity and addressability of digital, it is the adtech infrastructure that enables that.  Having the right tech infrastructure in place is an important factor in ensuring the ad experience on OTT – whether on CTV or on a mobile device is as seamless as it is on TV. "Consumers expect a smooth transition from content to ads and back to content again. They don’t want to see back-to-back ads, where the same ad plays twice in a row, or wait while the ad buffers or have an ad play in poor quality and at a different volume," he explained.

Is the subscription model dead?

There is always a space for paid subscription, especially amongst the affluent audiences, Ranganathan Somanathan, co-founder of RSquared Global Ventures, said. Over the last 10 years or so, Netflix has grown consistently, led by its distribution expansion and a strong affinity with the early adopters of the consumers. This period also saw them almost have a free run without any competitive pressures.

"As we look at their current numbers, we can see that their source of growth in the next five to 10 years is going to come by winning over the early and late majority of video content consumers. This segment of the customers look for strong value exchange," he said.

Without a doubt, Netflix is facing stiff competition from Amazon Prime and Disney too. As a leader, Somanathan said Netflix has to be the game-changer when it comes to building preference, loyalty and engagement.

"Over the last two years, we have seen Netflix rationalising its own marketing efforts. Some figures quote a significant reduction in its marketing and advertising investment in 2021 over 2020. This could have been a strategic error, in my opinion, especially when the competition was rearing its head," he said.

According to Somanathan, Netflix has the opportunity to consolidate and strengthen its leadership position. It needs to immediately look at building brand salience amongst the early or late majority of customers who constitute around 60% of the potential base.

Rather than just squeezing the bottom of the marketing funnel for more, it is about time they pivoted and took a more balanced approach to brand building, with serious investments at the top or mid-funnel.

At the same time, by not catering to the ad-supported segment, Netflix will be "leaving money on the table" for other OTT platforms to garner, he said, adding that an ad-supported model will potentially neutralise any "free-loaders" of their subscription-based delivery, which has become a bane for the company.

Netflix had the first-mover advantage in streaming, especially with its global rollout from 2011 onwards, which drove its subscriber base over more than a decade. However, Nishant Kaushal, head of data, strategy, and solutions at ADNA, told MARKETING-INTERACTIVE that advantage has been gradually diminishing with not many more markets left to go and increasing competition both from global as well as regional and even local players. 

OTT players grow either by securing more subscribers and/or extracting more value from existing subscribers. 

While content is definitely crucial in attracting and retaining subscribers, Netflix might see its leadership position in the library size challenged with Amazon Prime's recent US$8.5 billion acquisition of MGM. Kaushal said this will make Prime's library size balloon to more than five times that of Netflix's.

"COVID-19 being the new norm, people are now going back to normal lives which means that the trend of saying home to watch Netflix is less common now, hence more pressure on the business," he explained. Earlier this month, ADNA asked 1,406 Indonesians and 1,282 Filipinos if they would mind having advertising on their streaming services if it means a lower subscription fee. More than 90% in both markets were open to the concept with more than a third of Filipinos showed plenty of interest, Kaushal said.

Meanwhile in 2021, Netflix's subscription prices increased by as much as 40% in many markets, which Kaushal said "backfired a bit", leading to an estimated loss of 600,000 subscribers in North America alone. "The high inflation environment has made customers more cost-conscious," he said.

Netflix has already experimented with a low cost, low resolution, mobile-only plan in India to make headway in a very value-driven market with reasonable success, Kaushal said. And now Netflix is considering a low-cost, ad-supported plan making it more accessible to a larger population, especially in this part of the world. 

"Netflix will do well to focus on what it did very well for the last decade – grow its customer base by making itself more attractive for new subscribers as well as the 100 million households who use shared passwords. Even if Netflix manages to win over half of these households, it will see a massive 23% growth versus its current base of 222 million subscribers," Kaushal explained.

John Thankamony, client president, media group, dentsu Singapore added that at the end of the day OTT players will need to ensure that there is advertising yield systems start talking to their subscriptions data to ensure that they can move in a sensible way. 

“Over time they will need to see which avenues are best for monetisation, to ensure they maintain the balance between quality and scale. Platforms such as The Trade Desk are already focussed on OTT in a big way so this really adds some flavour to what the future of TV advertising looks like. This also opens new opportunities for growth for OTT players as they are able to acquire audiences who might have been out of their acquisition zone till now,” he said.

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