![Netflix’s Advertising Challenge: It Isn’t Big Enough](cache/0770002001719472198-710x346.png)
While Netflix is the biggest streaming service in Hollywood, it is barely in the top 10 for advertisers.
Good evening from Paris, where I am hopefully fast asleep by the time you read this. There have been at least five distinct eras in the media business this century, all defined by one of two words: grow or cut.
The first era was all about growth, fueled primarily by advertising. We saw the boom in cable TV, the last heyday of print and the dawn of the internet. This ended with the great recession, which ushered in a period of extreme cost-cutting.
The next era of growth began in the ashes of the recession, but this time it was fueled by subscriptions. Netflix and Spotify inspired everyone to charge monthly fee for their products. This ended, depending on your point of view, somewhere between 2020 and 2022, ushering in yet another age of austerity.
But we’re on the precipice of another boom period, at least according to Boston Consulting Group’s Neal Zuckerman, from whom I am borrowing this construct. Every major client of theirs is looking for a new way to generate sales. (Or, in the words of a consultant, they want “top line growth.”)
For some Hollywood studios, this may be video games. For others, theme parks. For many, and here’s where I may diverge from Neal, it’s just a fusion of the previous two waves.
Companies that made all their money from ads, like Google, are now selling subscriptions: YouTube Premium, YouTube TV, and Sunday Ticket. Companies that were once all about subscribers, like Netflix Inc. and Spotify Technology SA, are now all-in on ads.
Cannes, France, where I spent the last few days reporting, was filled with companies newly interested in selling advertising. The list includes the owner of Target, Uber Technologies Inc. and even credit card companies. We’re going to talk about some of the big lessons from Cannes Lions in a second – including news about Netflix -- but first…
Five things you need to know
Shares in Warner Bros. Discovery Inc. and Paramount Global plunged to new lows this week.
TV ratings for the NBA Finals fell from last year. It was one of the least-watched finals on record. Ratings for the premiere of HBO’s House of the Dragon fell more than 20% from last season.
Tubi is now more popular than Disney+ in the US, according to Nielsen. It had an average audience of 1 million viewers in May.
The co-founder of OpenAI is back with a new company he’s dubbed Safe Superintelligence.
A new TV show attempts to paint a softer image of Xinjiang, a Chinese province synonymous for alleged human rights abuses.
Screentime readers get 30% off tickets to our conference in October. You can snag a ticket here. If you don’t already receive this newsletter, sign up here. And if you have any tips, message me at lshaw31@bloomberg.net or on Signal.
Netflix’s advertising challenge: It isn’t big enough
Netflix has discussed creating free versions of its streaming service in some markets, namely in Europe and Asia, as the company looks for more ways to increase its audience, according to people familiar with its plans.
Netflix experimented with a free plan in Kenya, but discontinued it last year. Top executives at the company have discussed whether to create a free version of the service in far larger markets, especially those with popular free TV networks where it also sells ads. (Think Germany or Japan.)
The company has no plans to offer a free service in the US, where it already reaches the majority of its potential customer base, said the people, who declined to be identified because the plans are nascent. There are no current plans to do this anywhere — these are just talks, for now.
But a free service would help the company reach more people who either can’t afford the service or don’t have a good way to pay for it. It would also address one of the biggest present challenges for the company: creating more advertising inventory.
When it comes to video streaming, Netflix is the biggest player around (besides YouTube). But when it comes to advertising, it’s still a minnow.
Netflix Has A Long Way to Go
Netflix's is barely a top 10 player when it comes to video ad sales.
“They’ve been slow to scale,” one prominent advertising executive told me recently. Netflix is at best the ninth or tenth biggest player in online video advertising, and has been trying to charge as much as twice as the competition. “It’s not the most attractive place,” the executive said. “There is not a clamoring for them.”
Everyone in advertising gives Netflix credit for moving quickly. When the company’s growth stalled in late 2021, Chief Financial Officer Spencer Neumann advocated for it, persuading reluctant co-founder Reed Hastings to introduce a cheaper subscription option that included ads.
Within less than a year, Netflix had built an advertising business with help from Microsoft Corp. as a sales and technology partner. The deal was structured so that Microsoft guaranteed Netflix a certain level of advertising sales. In exchange, Microsoft secured a big-name client for its nascent video advertising business.
The cheaper, advertising-supported tier created an on-ramp for more price sensitive customers, like those who had been sharing their accounts. In that sense, the ad tier has been a huge success.
“We're making good progress there,” Netflix co-CEO Greg Peters said earlier this year. “But look, we've got much, much more to do in terms of scaling.” (During interviews earlier this year, Peters told me the company was “breaking land speed records in terms of growth.”)
But the rollout has been uneven. Netflix didn’t deliver as many impressions as it said it would. Its relationship with Microsoft grew strained. It dismissed Jeremi Gorman, its head of advertising, after a year and replaced her with Amy Reinhard, an executive with no experience in advertising (but who is well-regarded inside Netflix).
The company has been careful to manage expectations and reserve big numbers for specific presentations throughout the year. Netflix said last month that it reaches 40 million monthly active users. The number of people actually paying for the ad tier is far smaller.
In the US, Netflix’s advertising tier is a fraction of the size of Peacock, Hulu, Disney+ and Amazon Prime. (Let’s not talk about YouTube.) That’s true in terms of sales and viewers. A consultant told me this week that there are only four must-haves in the online video TV upfront marketplace: Disney, Comcast, YouTube and Amazon.
Amazon and Disney have taken different approaches to advertising than Netflix. They turned ads on for all of their viewers, telling customers they would need to pay more to avoid ads. While Netflix’s approach was customer-friendly, the Amazon approach delivered a large audience right away.
The vast majority of viewers for Prime Video – more than 75% -- are now watching with ads, according to industry executives. Amazon has also charged advertisers lower rates, undercutting the competition and forcing its rivals to scramble. (Disney is doing this too.)
Amazon’s growing advertising business was one of the biggest topics in Cannes this year. It’s a huge opportunity for marketers, according to Amy Worley, the chief connections officer of advertising agency VML. “It’s also terrifying,” she said, given Amazon’s clout in so many industries.
It would have been hard for Netflix to adopt the same strategy as Disney or Amazon. It had no experience selling ads, and its customers likely would have revolted. Netflix spent years pitching itself as TV without ads. Most of Amazon’s customers are paying for free shipping.
But advertising executives believe it is inevitable that Netflix will introduce ads to its most popular current tier in the future. (Don’t freak out, there are no current plans to do this.) When Netflix’s user growth slows — as most expect it will in the next 12 months — it will be even imperative to make more money from ads. And the only way to do that is with more scale.
In the near term, the company needs to find a quick path to create a lot more advertising inventory, which explains Netflix’s push into live events and sports. Viewers of the WWE will see ads whether they pay for the ad-free version or not. The same goes for NFL fans on Christmas Day.
There are some who still think Netflix is only in the advertising business because it needs to be — not because it wants to be. But the company says it sees advertising being a meaningful contribute to its business in the next couple of years, and is bringing more of the technology and sales in-house, a sign of its growing ambitions and investment. After years of giving customers an escape from advertisements, Netflix will be looking for more and more ways to show them to you.
Just a few years ago, every company felt it needed to have a point of view on the social issues, according to Harjot Singh, global chief strategy officer at McCann Worldgroup. Whether in response to the murder of George Floyd or other social movements around the world, companies weighed in on race, LGBT rights and much more.
But just as many companies are walking back their DEI initiatives, advertisers are far less interested in stepping into the culture wars. It may have something to do with the Bud Light crisis of 2023.
Yet even progressive voices in advertising are okay with this. Brands should only speak out on an issue if it aligns with their product or their corporate values (like Ben & Jerry’s). Otherwise, it feels hollow.
The no. 1 movie in the world is…
Inside Out 2. The sequel to the Pixar title delivered the biggest opening weekend since Barbie and has grossed more than $700 million in less than two weeks.
It’s a cultural phenomenon, and proof that the movie business is increasingly one of feast or famine. The big hits, like Inside Out 2 and Barbie, are massive cultural moments. They go viral just like the Eras Tour or Baby Reindeer. But if there is no momentum behind your movie, it dies.
I am curious to see if Inside Out 2 helps Despicable Me 4. If the idea of movie momentum is real, it will.
YouTube TV shrank
US pay-TV operators lost 2.37 million customers in the first quarter of this year — the worst quarter on record, according to MoffettNathanson.