Why the growth of connected TV makes Netflix ads so appealing

Despite increased competition in streaming, a wealth of data and subscribers makes any advertising on the platform a serious opportunity.

Along with news that it had lost 200,000 subscribers globally last week, Netflix also unveiled its plan to stop the bleed: an ad-supported tier with a lower subscription price.

Although advertising opportunities are, by Netflix’s estimation, still year or two away, Kaan Yigit, president and research director at Solutions Research Group (SRG), expects advertisers will line up when the previously ad-adverse company opens itself up, even with the amount of streaming competition that has popped up in recent years.

“It’s a relatively uncluttered and high-quality ad environment, a lot of highly targetable blockbusters with loyal following, no social media or unpredictable user-generated noise and traditional prime time ratings are further splintered anyway. Netflix is the number one video and TV source in Canada right now by any measure so why not.”

Yigit says that SRG doesn’t expect more than 35 to 40% of the full base of Netflix subscribers to be on an ad-supported tier in the short term. But with 33.7 million subscribers at the end of Q1, that is still a significant audience.

Dominik Majka, SVP activation, performance and investment for Cossette Media, says given the diversification of streaming services, it was no surprise that Netflix lost some steam to its emerging, less costly and sometimes slightly different competition. But competition isn’t the only thing that has been changing in streaming: the popularity and growing sophistication of ad targeting in connected TV has been steadily growing, and there are few companies that are more set up for success in that area than Netflix.

“Netflix brings a powerhouse combination of audiences and data which Netflix has accumulated over the last few years and that is something advertisers will welcome openly as it gives them an opportunity to continue to progress in CTV space and use powerful data to market to their core audiences,” Majka says.

In his statements last week, Netflix co-CEO Reed Hastings specifically pointed to the evolution of online advertising was a major factor in reversing his position on the “complexity of advertising.” While few plans for ads on Netflix have been revealed, Hastings did say the opportunity was in letting the company operate as a “straight publisher” while other companies handle the targeting and integrating the wealth of data the company has.

Despite the loss in subscribers, Netflix continues to be the dominant platform for streaming service globally and certainly continues to have the largest share of subscribers in Canada. According to Vividata Winter 2022 data, 49.92% of Canadians 18-plus watched Netflix in the past seven days. YouTube was next with 39.37%, followed by Amazon Prime (26.79%), Disney+ (14.34%), and Crave (11.25%).

The audience data that streaming services have access to is very attractive to buyers. Jenny Croswell, EVP, head of investment and agency operations at Horizon Media, says, “Anywhere you can capture engaged audiences within premium video environments will be a draw for advertisers and Netflix in its current form has tremendous scale.”

Sonia Sharma, communications director for Cairns Oneil, says the independent agency expects there to be some consolidation of streaming services in the future, but, until then, look to the platforms for as much viewer information as possible. “The success that the streaming platforms have at award shows and in dominating culture and conversations create new intrigue for viewers. It seems like we can’t get enough choice. The Netflix announcement appears to be a great opportunity for advertisers. Combining their viewership and content recommendation engine with targeting technology will allow brands to create truly unique and value-based opportunities.”

Wade Kuiken-Rogers, VP of business operations at GroupM’s addressable TV arm Finecast, is a little more cautious about the potential of advertising on Netflix. “I think we need to pump the breaks a bit and temper our expectations in evaluating the immediate opportunity an ad-supported Netflix. The CEO of Netflix, Reed Hastings, merely mentioned that they are open to the idea of ads and believes in consumer choice. I personally read this as a CEO stating to their shareholders that all options are on the table, including ad-supported content, after missing projections in both revenue goals and subscriber base by over 20%, and dropping.”

Even if Netflix is serious about ads, Croswell says there are other considerations to be wary of. “There is still much to be determined regarding how all of this will be monetized and whether Netflix can attract net new audiences or if their existing audiences will migrate to a less expensive, ad supported tier. There will be real concerns with this too, like how this will impact the Canadian media economy.”

But as the saying goes, where there’s smoke there’s fire says Kuiken-Rogers and, ultimately, the headwinds of increased competition for subscribers alongside the increased production costs of creating and buying original content cannot be met with shareholder value and subscriber fees alone. “A hybrid or free-mium ad-supported model seemingly is the answer. This creates a great tailwind for the advertising industry and if, and most likely when, this happens, the opportunity it presents from a monetary and competitive standpoint speaks for itself as Netflix is currently the largest streaming player in market.”