Netflix sees ads as way to attract different audiences

Netflix, the streaming platform, believes the planned introduction of ads to its service can help attract customers who have never signed up before, previously cancelled their subscriptions, or currently access its content through password-sharing.

The background

Netflix had just under 220.7 million subscribers at the end of its last trading quarter, down by 970,000 from the previous three months, although that decline beat analyst estimates, which pegged the likely contraction at nearer two million. With subscription growth proving a challenge, and rising competition, the company plans to introduce advertising in “early 2023” to attract more users, as well as to generate revenue from brands.

The audiences

Greg Peters, Netflix’s chief operating officer/chief product officer, identified several audiences that could be tempted to use the service thanks to a cheaper, ad-supported pricing tier during an earnings call:

• At a time of rising “price sensitivity”, he noted, the lure of a more affordable streaming option might be attractive for many.
• More broadly, he suggested this option may appeal to “folks that have never actually signed up for Netflix” and others who “were members for us for a period of time and they decided to cancel for a variety of reasons”.
• Another potential segment of growth are “folks that are currently watching Netflix, but they’re using another paying members’ account credentials,” Peters said. Around 100 million households engage in this activity, the company reported in April.
  
• “Those all, I think, represent opportunities for us because we’re bringing a wider range of prices through the ad-supported offering, a lower consumer-facing price to be able to attract a broader set of members,” Peters told investors.
  

The strategy

• Peters reported that Netflix would use a “crawl, walk, run model” to develop its ad proposition, meaning it is likely to start with “what you’re familiar with”, then develop more innovative solutions over time.
• This month, the company signed a deal with tech giant Microsoft, which will serve as Netflix’s global advertising technology and sales partner.
• Netflix’s discussions with brands and agencies have already yielded a “high degree of alignment” around topics like frequency caps and delivering a “pro-consumer” ad experience, Peters continued.

The financials

• He also predicted that advertising revenues will inevitably be a small part of the revenue mix at first, but expressed confidence that “we can grow it to be substantial over a period of time”.
• Based on initial discussions with advertising executives, Peters said, “we’re quite optimistic that the unit economics work to make that monetisation equal or maybe even better than what we would see on the comparable side for the non-ad, subscription-only kind of plans.”
  

Sourced from Seeking Alpha