Netflix at 25: The Ad Industry Weighs In
On August 29th 1997, Reed Hastings and Marc Randolph founded a company that would go on to shape the future of media and leave legacy entertainment giants trailing in its wake. Back in 1997, though, Netflix was devised as a DVD subscription service - a business model that would destroy the traditional movie rental industry (fun fact, Blockbuster turned down the opportunity to buy Netflix for $50 million back in 2000). Of course, it wasn’t the postal DVDs that got the old school studios like Disney, Warner Brothers, and Paramount to scramble. It was a game-changing combination of data and personaliszation (Netflix’s Cinematch algorithm was recommending movies for specific users even back in the DVD days) and, of course, its streaming platform. Add to that a string of big budget, must-watch TV series and deals with major directors, and Netflix has looked like an unbeatable contender ever since.
As Netflix turns 25, though, that romping momentum is starting to falter. In the second quarter of 2022, it lost nearly one million subscribers - and while it still has an impressive 220.67 million subscribers globally, rivals like Disney+ are closing in. But there are also signs that Netflix is moving into a new phase, transforming once again. For one thing, there’s the ad-funded model, which is set to launch in early 2023 and it’s investing in cloud-based gaming. If we’ve learned anything about Netflix, it’s not afraid to change course.
Over the past two and a half(and a bit) decades, Netflix has changed our viewing behaviours and shaped culture with hits like Stranger Things, Squid Game, Bridgerton and Tiger King. It’s inspired tech giants like Apple and Amazon to get into the entertainment and content-production game, while dragging media giants into the streaming age. So what do the next 25 years hold? And what will Netflix with ads look like and mean for brands? We speak to media and entertainment experts from the international advertising industry.
Emma Moorhead, General Manager, Wavemaker UK
Many - perhaps even Netflix's CFO, who insisted an ad-funded tier wasn't "...in plans right now" - may be surprised that Netflix has embraced the new model. But, with extensive content budgets, stiff competition and a cost-of-living crisis - something had to change to create some financial stability.
After partnering with Microsoft's ad tech platform Xander, Netflix appears to be taking the programmatic buying route, offering an audience-led approach. Enders estimates that if 10% of Netflix viewing were from ad-supported subscriptions, it would be equal to Netflix taking 1% of the UK TV market. So, the overall impact will be relatively small, given that Netflix accounted for 7% of total video viewing in 2021 - about the same as Channel 4. An audience-led approach needs measurement to demonstrate an incremental or unique value in an already competitive commercial TV spot market. Consequently, Netflix would need to join BARB and other local measurement currencies, which they appear (like many streaming services) reluctant to do.
Many are hoping for more of a content-led approach, which allows brands to align with specific programming. Driving sponsorships over spot advertising would enable brands to target some of the most watched shows worldwide while offering a less intrusive ad load for its audience. However, the global nature of the content is a challenge. It's attractive to global brands but might limit the appeal to local advertisers. Netflix will need to refocus its content strategy, concentrating on the longevity potential for each series as well as thinking about other genres that they don’t currently support. For example, live TV, particularly sports content, hasn't been a priority but could be a huge audience draw.
Netflix will likely adopt a ‘test and learn’ approach, starting in a couple of markets and evolving its strategy over time. Regardless of how it begins, we know that Netflix is exceptional at adapting its business model, and it's already well versed in working with brands - product placement features heavily in their original content. As the long-reigning king of streaming, if anyone can positively disrupt this ecosystem, Netflix can.
Adrian Tan, Head of Media at Town Square Agency, Australia
I think most people would agree that the arrival of Netflix exacerbated the fragmentation of the TV viewership - but it also contributed to the rise of BVOD as consumers (especially the older demo) are now more comfortable with the idea of watching TV on demand.
As a media planner, I’m excited that Netflix (and Disney+) is introducing an ad-funded model. They obviously have the audience, and it would be another tool in our belt to help achieve our clients’ marketing goals. However, it would be interesting to see how this affects their subscribers as I imagine there would be cannibalisation into their ad-free subscriber base.
This is undoubtedly a game changer, and I foresee most other streaming platforms following suit soon enough. We already have clients interested in trialling this to supplement their linear TV campaigns as soon as they become available.
Within the next 25 years, with the continued uptake of smart TV, our linear TV, BVOD and Netflix, campaigns will evolve into an all-encompassing video campaign where can we confidently plan and buy the optimal reach and frequency. We’ll then be able to retarget those audiences via our digital campaigns. We’re practically halfway there now.
Ella Kersey, Head of New Business & Marketing – EMEA at M&C Saatchi Performance
Netflix pioneered the streaming industry and as it celebrates its 25th anniversary, they open a new chapter - the ad supported era. This will likely become the primary source of revenue for Netflix with the number of ads per viewing time set to outstrip their competitors. There will be a transitional time for consumers as they adjust to the different models and come to terms with new price points – but the days of relatively cheap ad free streaming is likely to be a thing of the past as others look to follow Netflix’s lead.
The opportunity this presents for brands is huge. As tracking of digital campaigns becomes limited, the ability to advertise in the contextually relevant programming of Netflix could prove especially effective. Fuelled by the in-depth insight on audience interests that sits within the streaming services’ data points, brands will be able to place relevant ads that engage the perfect audience group.
This switch from Netflix could also lead to more exciting strategies for how we deliver ads. Whether it’s opening the door to digital bidding or even introducing sequential ads that show a brand story across the slots of one particular programme, the ball is in Netflix’s court on how far they’re looking to innovate advertising placement. While the opportunities to create highly relevant engaging ads will prove exciting to many, brands will need to be careful to adapt their campaigns to the watching behaviour of Netflix viewers. Frequency caps will need to be a major consideration for the binge-watchers as well as regular creative refreshes to not wear down a captivated audience.
The Netflix advertising model has the potential to establish a new and exciting precedent for streaming services and will go so far as to redefine traditional tv advertising. Definitely an exciting time for the media industry!
Alex Sherr, Client Partner, Havas Entertainment (part of Havas Media Group), UK
Netflix has fundamentally changed how we consume content and our expectations of how content should be consumed. But what has made it one of the world’s biggest entertainment brands, is the way in which it has transformed the social and cultural landscape at the same time. The content it has bought and created is so entwined with our daily lives that when social conversation inevitably gets onto, ‘Are you watching anything good right now?’, the response tends to be a Netflix show. But these have become more than just TV shows. Its programmes have become cultural references, events and experiences, with IPs living far beyond a TV, laptop or mobile phone screen. It’s almost as though Netflix understands more about what we want to watch than we do ourselves. After all, who could have predicted that Squid Game, a dystopian South Korean drama, would become the platform’s most watched show globally?
Like any business, Netflix now has to adapt and pivot, but consumers have always been open to the value exchange of seeing advertising as long as the content they get to watch is good at the end of it and, based on the properties we’ve seen over the last 10 years at least, that’s likely to be the case. For example, for a brand to be able to buy into the final ever episode of Stranger Things, and to build an activation around it, would represent an exciting opportunity to create a meaningful moment in culture. Netflix just needs to make sure that it makes it as easy as possible for advertisers to buy into relevant shows in order to reach the right audiences. If the Netflix advertising algorithm is anywhere near as strong as its show algorithm for viewers, then it will be well placed to continue its success in future.
Rita Steinberg, Digital Media Director at FUSE Create, Canada
From waiting to watch one episode a week, to settling in on a Sunday to watch 8 hours of Stranger Things, Netflix has transformed the way we watch – or rather binge – entertainment. Their reach is not just demonstrated through the number of subscribers, but the mass cultural influence it now has on trends and pop culture. While you may not have watched ‘Squid Game’, you saw it referenced on your favourite morning show, podcast or blog. Until now, that entertainment has been uninterrupted, but with the economy, consumer behaviour, and competition continuing to increase and evolve, that was bound to change.
When thinking about the next 25 years, we need to consider the future of our attention and how it will be distributed. With VR/AR, metaverse and voice all slowly creeping into our advertising capabilities, I think we’re going to see new forms of advertising and integration as Netflix finds its footing within the ad supported tier. Personalisation and interactivity will continue to rise in an effort to seamlessly integrate into the experience.
In terms of capabilities and what we’d like to see, it comes down to targeting, measurement, personalisation, and integration. To start - demographic, behavioural, and contextual levels of targeting allowing media buyers to target by show and genre. When it comes to data and analytics, ideally, Netflix will have equal, if not better levels of measurement than CTV and other streaming services. To measure the effectiveness of ads on the platform, we’ll want to look beyond impressions and other vanity metrics to understand engagement levels, ad recall and conversion potential. Linear TV is not exciting as it used to be for advertisers and that’s in part because of their targeting capabilities and limited ad formats. With Netflix stepping into the ad supported world, they need to be looking forward and not back.
Marc Bignell, Commercial Director, the7stars, UK
Netflix has changed the way we consume on demand content in the last 25 years and fundamentally changed the financial model of the entire Audio Visual ecosystem. Blockbuster shops closed, film release strategies changed, Broadcasters rushed to launch subscription-based platforms and viewers found a funky new home to satisfy their AV appetite. At the same time, the valuation of the company soared as subscribers grew - until last year, when the first subs net gains started to wobble.
Financially it is difficult to fully understand the true rationale behind Netflix’s move to a partial ad model: is it to drive incremental ad dollars or purely a way to appease the financial markets with a short term subscription injection via a lower entry cost model for consumers? The marketing dilemma – how to provide a lower cost entry tier without losing full fat high ARPU customers - will be tricky to manage, the perceived quality of the incremental ad addressable consumers will be interesting and the ingestion of ads into content not created for ads will be logistically (and legally in terms of rights) challenging.
Even without much information available as yet, ultimately the move should be good for the ad market: incremental new (or returning lost) consumers to drive commercial audiences, increased ad opportunities for clients, a combination of addressable and environmental targeting and a potential uptick in the Netflix share price.
I also see a halo effect for commercial VOD and the wider AV marketplace. A combination of ads on Netflix, the ITVX launch, and C4 long form content availability on that other Global AV platform YouTube, all points to an exciting and evolving AV marketplace in the UK.
Only a couple of slight worries from me though: global platforms can lead to global content creation and distribution - and coupled with the potential privatisation of C4, I fear for the financing of truly British content for diverse British audiences. Still, it could be worse – you might have been an investor in Blockbuster!
Jon Skinner, Founder & Creative Partner at The Core Agency, Australia
It was around 2011 when I first subscribed to Netflix. This was four years before it launched in Australia, so it was a US account MacGyvered together using some dodgy online geo-unblocking tools and a virtual VISA card. With all that in place I just had to enter a local zip code (90210…) and I’d unlocked what went on to create the new golden age of television viewing.
Like the now-reported 220 million other subscribers globally, I binged on a diet of House of Cards, Stranger Things and The Crown. Not only was it brilliant content, it cemented the local free-to-air providers’ reality re-runs and b-division dramas as simply unwatchable. Which is a pretty awkward dilemma when you work in advertising.
Fast-forward to 2022 and the platform’s subscriber numbers are now set to drop for the first time ever. So brands, and the advertising dollars they bring, are set to be the streamer’s saviour.
Thankfully, with a premium subscription, Netflix viewers will get the option to avoid having their immersion in Ozark, The Queen’s Gambit or Cheer interrupted by other, more often than not, less entertaining 30-second stories.
So where can brands fit into the next enthralling season of Netflix?
I would love to see more innovation and less interruption. Imagine seamless integration of brands into stories and programmes, where they are relevant or add value to the viewer experience.
Product placement could be rendered in real-time into the action, even on a per-subscriber basis. And we don’t have to wait another 25 years, as the technology exists today. So perhaps when Eleven grabs a can of soft drink in the next season of Stranger Things it could be rendered as either Coke or Pepsi, depending on the highest bidder or your viewer profile. Or maybe when Tom Cruise puts on his sunglasses in Top Gun 3, they are the latest model from Ray-Ban, Oakley or Persol depending on who is watching.
Product purchases in the real world could unlock online content. ‘Just scan the QR code inside a Mars Bar wrapper to unlock the next episode of Lost in Space!’
Needless to say, the opportunities to create original ideas for brands within platforms such as Netflix are endless. And that is our industry’s next exciting challenge.
Anna Glover, Entertainment Business Director at M&C Saatchi Sport & Entertainment
Netflix fuelled a TV revolution that fundamentally changed the entertainment landscape. Creating new behaviours, genres and fandoms that took TV from film’s ugly sister to queen of content and conversation.
‘What are you watching?’ is now the new ‘How was your weekend?’ as TV continues to consume water cooler moments, WhatsApp groups and hairdressing appointments around the globe. And it was Netflix that flipped TV into this cultural phenomenon.
We shouldn’t be afraid of this new era of ad funded models. They’ll continue to democratise TV by engaging new segments with more affordable packages, whilst retaining existing subscribers. And as the streaming giants continue to focus more on cost and profitability, perhaps we’ll see this open-up new opportunities for brands and specifically partnerships.
The ability to connect with TV fans through the shows that they love is an exciting proposition. I’d love to see this unlock Netflix’s blockbuster releases and golden handcuff deals with likes of Shonda Rimes and Ryan Murphy. They hold the key to the future of TV, creating huge moments in culture through superstar screenings and uber-targeting that ensures the whole world is watching.
It will also be interesting to see how entertainment subscriptions are impacted during the upcoming recession. Back in 2009, we saw consumers value passions and experiences more than ever, will we see the same for streaming? We know from the pandemic that TV provides the ultimate escape and connection for this streaming generation so maybe it will prove itself recession-proof.
Photo by Venti Views on Unsplash
