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Netflix says it will make at least the same money from ad viewers, while growing user base

Netflix expects to make at least the same money from users of its forthcoming ad-supported tier as from subscribers to the ad-free option and views the ads plan as a way to grow its user base. So much third-party content on the service can carry ads without additional rights clearances that the ad-tier could be launched tomorrow at scale. Ad-UX innovation is a key ambition, albeit rolled out over years. The company used its latest earnings call to reveal more on its pivot to a hybrid monetisation model.

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Netflix expects to make the same money from users taking its forthcoming ad-supported tier as those who pay a larger subscription to see an ad-free experience, the company revealed at its Q2 Earnings Call this week. Gregory K. Peters, COO & Chief Product Officer at Netflix, made it clear that the ad-supported tier is not viewed as a money-making machine, but as a way to grow the user base with an offer that is “neutral to positive on the unit economics and monetisation.” “So that’s great for us from a business perspective,” he added.

Spencer Adam Neumann, Chief Financial Officer, reiterated: “There are incremental costs [to launching and operating the ad-supported tier] but we believe it will operate at ‘income neutral to positive’ pretty soon out of the gate.”

The big advertising build-out is scheduled for 2023-24 and ad-funded revenues will “start small relative to our total revenue mix,” Peters said. “But we think we can grow it to be substantial over a period of time.”

Netflix expects the ad-supported product to appeal to consumers who are price-sensitive, including people that have never signed-up to the service and those who were members but cancelled. It is also one tool in a wider strategy to convince people to sign-up who are currently unauthorised sharers of someone else’s subscription. “These all represent opportunities for us because we’re bringing a wider range of prices through the ad-supported offering – a lower consumer-facing price to be able to attract a broader set of members.”

The company can launch an ad-supported tier without the need for additional clearance rights, as enough of its third-party (non-Originals) content can be advertised against within existing ‘carriage’ agreements to provide the scale needed. But the company will move to get permission from studios where those additional usage rights are needed, the company revealed on the earnings call. Theodore A. Sarandos, Co-CEO, Chief Content Officer & Director at Netflix, added that Netflix won’t clear its entire catalogue for advertising, “but it’s not a material hold-back to the business.”

Netflix is promising innovation in the advertising user experience and Peters said, “We can deliver an experience which is fundamentally different from the ad experience on linear in a way that supports all stakeholders.” He promised the ad-UX would be very consumer-centric, and would take an innovation-oriented view, with that innovation rolled-out over a period of years, iteratively.

There is a high degree of alignment between what Netflix thinks the ad experience should be and what media buyers are telling them, Peters stated. “That alignment and optimism [from talks with major agencies] is increasing my excitement. I think it’s going to be a win-win for all parties.”

All ads served on Netflix will come through Microsoft exclusively (sales and tech-stack) and Peters said Microsoft’s technical capacity, go-to-market capacity and focus on innovation were key reasons that the streamer has partnered with them. “We are approaching this as an opportunity to collaborate and to evolve the technical capacity and the ad-experience, and the go-to-market approach, over time,” the executive told financial analysts.

He added: “We saw a high degree of strategic alignment in Microsoft’s interest in innovating in the space and really working with us over the next several years to try to create a new ads ecosystem around premium TV. And we’ve seen the long arc of advertising towards a very pro-consumer experience that does not detract from the Quality of Experience, while still having a strong advertiser/brand focus. There has been a lot of alignment on that.”

Peters would not discuss the terms of the deal with Microsoft, when asked if there are “some significant guaranteed revenue commitments” from Microsoft. He was also non-committal on how many ad-supported tiers there might be but did say “we want to keep it as simple as we can from a consumer-facing perspective.”

Not surprisingly, Netflix will launch the ad-supported tier first “in countries that have more mature ad markets where we can feel confident in the ad monetisation.”


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