SVODs and ads: It’s complicated

With the OTT market now welcoming another player – Apple – MiC taps its digital experts on how ads on SVODs are likely to be received, and where the potential lies.
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Around the globe yesterday, curious minds and tech junkies alike covertly donned their headphones and fixed their eyes to their monitors, anxiously awaiting Apple CEO Tim Cook’s announcement on the tech co.’s much-anticipated music and TV streaming service.

Apple has yet to drop all the details for the offering – it’s promised an ad-free experience but has not yet announced a price; it’s promoted originals featuring the likes of Reese Witherspoon and Jason Momoa. It will be available in 100 countries this fall.

Even with slim details, analysts and market watchers have called it everything from one of “the boldest and most daring bets in the company’s history” to “Apple-ishly mindblowing“. Regardless of how excited they are, few, if any analysts, have taken a deep dive without mentioning rival streaming service, Netflix.

Long considered the preeminent streaming service, Netflix is facing a different business landscape than it was several years ago. Over the last year, fluctuating industry rumours have alluded to the possibility of ads on the platform. Netflix has never confirmed – to MiC or elsewhere – that it intends to do so, although last fall it did engage in a small test in some markets where it aired ads for its original shows between episodes of select content (it’s also been reported to be working with brands on in-show integrations).

Still, despite a lack of confirmation, some analysts have said Netflix may soon find itself at an impasse: change up the revenue game or risk falling behind. Some think ads could be a good idea (like Media Experts’ Carol Cummings) while others have pointed to the risk of Netflix shifting away from its core value proposition.

That sentiment has risen after several quarterly reports in a row suggest slowed growth in key markets, particularly the U.S. That domestic slowdown has been attributed to an increasingly saturated market, which is now welcoming yet another player.

MiC reached out to several of its top digital and TV experts to discuss the potential impact of ads in a subscription world – why they might be necessary, what kind of alternatives are out there and what they mean for the advertising community.

Stacking up against competition

Just how much competition Netflix has for the eyeballs of Canadian viewers (and beyond) seems to vary day-to-day. Competition in Canada has grown, relatively speaking. Bell Media’s Crave reported 2.3 million subscribers earlier this year, and although Amazon Prime Video doesn’t release its per-market numbers, a study by the Media Technology Monitor (MTM) puts Prime Video at 12% penetration after two years on the Canadian market.

Both pale in comparison to Netflix, which reaches an estimated 60% of Canadian households according to that same study. Netflix Canada also lacks competition from mainstream SVODs not yet available in Canada, such as Hulu, as well as more niche services like anime streamer Crunchyroll, HBO Now (although HBO is included in a $24 monthly Crave tier), Sling TV and others. Sony’s Crackle exited Canada last year, CBS All Access is still in its infancy in the market, CBC’s Gem lacks a vast library of more current popular U.S. series like Brooklyn Nine-Nine and Riverdale, and sports streamer DAZN has been met with tepid reviews for its delivery quality.

And, both in and outside of Canada, some SVODs have quietly exited the game. Since 2016, Verizon’s Go90, Vessel, Fullscreen and others have shuttered. YouTube has also reportedly cancelled plans to invest in premium originals for its paid, ad-free tier, no longer accepting pitches for new TV and film projects.

California-based author and analyst Peter Csathy, who specializes in the SVOD market and founded consultancy Creatv Media, tells MiC that in the last several years, Netflix has ramped up its content spend in ways that have made the production community drool (“They’re very liberal with their wallets,” he says) but that have also put the company in a tough spot.

“Its long-term challenge, when it stands up against behemoths like Amazon, Apple and YouTube is that Netflix only has one way to monetization – subscription. ” With other more vertically integrated companies like Apple and Amazon running VOD services essentially as secondary services, Csathy says they have more flexibility and freedom. “Apple can lose money on the video side. Amazon can lose money on the video side. If they don’t make a dime on the video themselves, they’re fine, because they use these services as a way to bring us in and keep us shopping, or buying music.”

Csathy said the multi-tiered model – cheaper prices for ad-supported content, higher prices for ad-free – worked well for Hulu. While he says Netflix users may have had the ad-free experience for too long, it faces “an existential crisis up against these multifaceted business model behemoths. It has to do something.”

While Csathy says he can see Netflix doing everything it can to avoid ads, if it were to engage in selling ads, it would likely have to offer an ad-supported subscription model “at bargain-basement price points.”

The Apple factor

Solutions Research Group president Kaan Yigit agrees that a tiered model would be the way to go, if Netflix were to consider ads. “I can’t see a day when Netflix would not preserve a full ad-free tier,” he says.

Not having ads is an expectation for customers at this point, he says. “Not having ads is part of the value proposition for a large segment of their customers,” he says, citing qualitative research SRG did on the issue 18 months ago.

As for Apple, he says, the structure is different enough from Netflix that Yigit doesn’t see it infringing on Netflix’s territory as much as some others do. He says the more interesting proposition is Netflix’s update to its core Apple TV offering, which added a number of digital streaming services and would allow users to aggregate their subscriptions into a single platform.

“It’s a better mousetrap, if you will,” he says. “I do expect it will have some traction, but… Netflix has full control over all aspects of the service and is offering titles, not channels or other services with aggregated titles.” For consumers who have been more longtime traditional viewers, he says, it’s a “great new option,” but he doesn’t see it infringing on Netflix’s territory anytime soon.”

The complicated proposition of ads

The idea of one more digital giant in the advertising game makes Chris Williams ask one big, existential question: “How many walled gardens are we going to have to deal with?”

Williams, VP of digital for the Association of Canadian Advertisers, is referring to the number of digital platforms that sell ads based on data that lacks crucial transparency.

Although he wouldn’t comment specifically on Netflix, he says any new player coming in that bases its ad sales on digital user data adds a layer of complication for advertisers. “I understand why [walled gardens] exist. In many cases, it’s for reasons of privacy and data integrity. The challenge is, how are we going to de-duplicate these audiences across the walled gardens? None of the [platforms] completely own one audience, so how do we create bridges that are privacy respective, that allow marketers to reach people and understand the impact of their campaigns?”