Starting today, Netflix users in the US will have the option to sign up for a cheaper subscription. But of course there is a catch.
If you want to pay $6.99 a month, instead of $9.99 a month or more, your TV and movie sessions will be interrupted by ads, which goes against the original premise of Netflix and many other streaming services: just content, no advertising. But now that is changing.
Marketplace’s Kimberly Adams spoke with Brandon Katz, an entertainment industry strategist at Parrot Analytics, who said Netflix needed to make this kind of move. The following is an edited transcript of their conversation.
Brandon Katz: As Netflix’s growth slowed, and it actually lost subscribers for the first time in 10 years as an original content provider earlier this year, it could no longer sell Wall Street by adding massive amounts of subscribers every single quarter. Instead, they are trying to pivot and refocus the narrative of Wall Street around revenue, profit and free cash flow. So bringing in an ad-supported tier is expected to generate billions in long-term revenue, hopefully increasing their total addressable market by making an ad-supported, cheaper option available to a wider range of potential customers.
Kimberly Adams: And how is this expected to roll out and be picked up in the US versus the rest of the world?
Katz: Yes, that’s a very interesting question, because not only do they have to figure out new licensing agreements with original content owners, but they have to do it market by market for where they roll out the ads here. And now Netflix will start rolling out in the UCan market – and that is the USA and Canada. So really, the domestic arena, which is their most important market, because it’s the most saturated and highly competitive of all the streaming markets, and that’s where they’ve actually been losing subscribers in recent quarters. And so [it] will slowly roll out in overseas markets over the next few months. So it’s a very, very important and strategic rollout for Netflix. It’s not without a whole bunch of complications that make this a high-wire act to balance what they want from an upside perspective and what they need to do from a logistical, realistic perspective. So it’s going to be very interesting to watch this slow and steady process.
Adams: Netflix isn’t the only service introducing ads right now. Disney+ will do so next month. What does this tell us about the overall streaming ecosystem?
Katz: It says a lot about the economics of streaming, which is not as advantageous and profitable as the traditional, linear model. And now we’re just recreating the older pay TV model via the internet. We probably won’t see anything like Netflix’s early heyday in entertainment again.
Adams: Netflix is known for its very powerful recommendation algorithm. How will it work at the ad-supported level?
Katz: It’s going to be very interesting to see the difference between ad-supported and ad-free, because I think they’ll probably have to roll out a siloed, top 10 carousel for the ad-supported market. I also think with ad supported tiers you need to have some reset so your preferences from ad free may not carry over when you switch plans.
Adams: For those who still have cable, it’s such a targeted experience when it comes to advertising. It’s not just what city you live in. It could be what neighborhood you live in, or even what your cable company knows about you when it comes to what ads are shown to you. How, in this case, do you think Netflix is going to navigate this kind of ad targeting?
Katz: This is an important question, and I think it has ripple effects for the whole industry. Number one, you have responsibility. So Netflix has already announced that it will not include ads in its kid-oriented programming, as that has been a huge issue and problem for YouTube over the years. And on a larger scale, we see the entire streaming industry [and] you continue to see debates emerge about whether a streaming platform is going to include political ads or ads from alcohol companies. And if they do, it goes to, “OK, are we making sure we’re targeting the right people or people who are 21 and older who can buy these products?” It will be a whole new battlefield to navigate.
Now, Netflix has been an innovator and disruptor from day one, and they have already promised to under-index the amount of ads per hour than the competition does. I also wouldn’t be surprised if Netflix innovates further and tries to look for new and interesting ways to deliver the ad experience to users. Now they partnered with Microsoft for their ad tier, which was a bit of a surprise given how entrenched and established other companies like a Comcast were in this field. But they also did it so that they had no overlap with a competitor. Microsoft is not a competitor for streaming video on-demand content from Netflix. So between those two and those kind of surprising left-field choices, we have to expect, based on the company’s track record, that they’re going to try to innovate and update the ad experience. Exactly how? Well, we’ll have to wait and see, but I’m excited to see what they come up with.
Adams: So as someone who follows the space, what are some of the challenges you’ll be looking at now that Netflix also has to respond to advertisers?
Katz: I am very interested to see how this contributes to greater transparency in viewership and ratings within the streaming field. We are obviously going to see that Netflix has to hand over viewing statistics to advertisers here in the US market. And often, in these media conversations, these numbers can leak out to the public. So I’m very, very interested to see how this development contributes to more transparency in the streaming world, because as of right now it’s been extremely nebulous, extremely tight-lipped, and a lot of creators and showrunners and producers really have no idea how many people are watching the shows theirs, because streamers like Netflix are very selective about the data they pass on to their own creative partners. So this could be the first domino in what is a very significant overhaul of the streaming transparency era.
Adams: Right, because it matters to those creators when they negotiate their deals.
Katz: Absolutely, because this has hurt the middle class of writers who are now forced to jump from job to job because streaming has really shortened TV seasons for the most part, and aren’t equipped with the same data, insight and information they once were. a linear Nielsen rating. So they can’t argue for higher fees or more extended benefits for their author space. So this is a very, very, very pivotal potential moment in the industry because it can hopefully balance the field in favor of the creatives who are trying to negotiate more for their pay, for their writers’ rooms, for their benefits, and it’s become much more difficult in this fragmented, abbreviated TV industry that we find ourselves in now.