The ads won’t hit Netflix until 2023, it was confirmed today (July 19).
When Netflix co-CEO Ted Sarandos confirmed in late June that the streaming giant was indeed planning to launch an ad-supported subscription tier, he didn’t offer a date for when that tier could arrive. However, reports based on leaked internal communications from Netflix indicated it would be before the end of 2022.
If that was the plan, it’s now been delayed, with the company now targeting early 2023 to roll out the ad tier. This news follows the announcement that Netflix has partnered with Microsoft to provide the platform for advertising on the platform, with Microsoft described as “Netflix’s technology and sales partner”, although some wonder if they might end up ending more.
Netflix executives confirmed the news in a company report to investors (opens in new tab)in which they revealed that the streaming giant had lost over 970,000 subscribers in the period up to June 30 this year.
The report details the planned launch of the tier, stating, “We recently announced Microsoft as our technology and sales partner and are aiming to launch this tier in early 2023. They are investing heavily to expand their multi-billion premium television video advertising business, and We are excited to be working with such a strong global partner.”
Netflix went on to say that they will target “premium CPMs from branded advertisers” and that the level “will likely start in some markets where ad spend is significant. Like most of our new initiatives, our intention is to launch it, listen, learn, and repeat quickly to improve the offering. So our advertising business in a few years will likely be very different from what it looks like on day one.”
CPM is an acronym for cost per thousand impressions, a marketing term used to denote the cost an advertiser pays for a thousand ad impressions on a web page. For example, if a website publisher charges $2 for each CPM, that means an advertiser must pay $2 for every 1,000 impressions of their ad. Google’s average CPM is around the $2.80 mark, but this statement seems to suggest that Netflix will try to charge more than that.
The statement is upbeat about Netflix’s plans for the ad-supported tier, saying, “Over time, our hope is to create a better-than-linear TV ad model that is more transparent and relevant to consumers and more effective for our advertising partners. .While it takes some time to grow our membership base to the ad level and the associated ad revenues, in the long term we feel that advertising can enable substantial membership growth (through lower prices ) and profit growth.”
A lower ad-supported price tier is not a revolutionary idea for a subscription service. Hulu, HBO Max, Paramount Plus and Peacock already do this and Disney Plus will also bring the option this year, but it looks like Netflix is already trying to do its own thing.
Greg Peters, Netflix’s chief financial officer, told investors that the ad-supported tier will be done with an “innovation-driven vision.” He added: “It’s a track, walk and run model. At first it will be what you know, but over time we think there is a tremendous opportunity to leverage the DNA of innovation that we have. The scale of our offering and the partners that we have lined up, we delivered something fundamentally different from linear television. Brands wanted to connect with Netflix content.”
It’s all pretty vague at the moment, but it’s clear that Netflix has big plans for this new level.
Analysis: A reluctant convert
Things quickly changed for Netflix with the launch of an ad-supported tier, which will cost less per month than its current subscription plans.
In early March, the company’s CFO Spencer Neumann was asked about the prospect of an ad-supported level and went so far as to say that he “could never say never” when asked about the idea, before quickly adding that “it’s not something in [the brand’s] plans now.”
Then, on April 20, during an earnings call, Sarandos’ partner-in-crime, Netflix’s other co-CEO, Reed Hastings, revealed that the streaming service was “pretty open” to the possibility of an ad-supported tier. and could “figure in the next year or two.”
Here we are in mid-July and not only are ads on the way, but Netflix has teamed up with one of the biggest companies on the planet to help them get there faster.
They are talking about a good game, but company executives took a long time to even consider doing commercials on their platform, a fact they acknowledged in their new investor report, writing: “At Netflix, focus remains very important to us. . These initiatives – paid sharing and advertising – introduce some additional complexity.”
In November 2021, when Netflix stock was trading at $700 each, Sarandos and Hastings would never have dreamed that 18 months later they would be releasing a new tier in an effort to stop subscriber bleeding. This kind of growth was never sustainable, the Covid-19 pandemic was a nightmare for all of us, but it made a lot of money for streaming services as people were stuck in their homes with nothing to do but watch television. Millions who would have spent their lives watching linear television suddenly had time to invest in streaming services. Now the pandemic is in the rearview mirror, this drop in subscribers is a bit of a course correction.
That’s not something investors would be happy to hear. They want to keep those numbers. So Netflix executives are doing what they never wanted to do and leaving commercials on their platform. The question now is, will this work to keep the numbers up? Or, ideally, the commercials will be annoying enough to push people back to become full subscribers again.