Can Netflix scale its advertising business?

Netflix is the biggest subscriber video streaming service in the world, with 269.6 million global paid memberships as of March 2024. But it's still a minnow in the world of advertising, barely reaching the top 10 when it comes to video ad sales.

While Netflix is celebrating a successful second quarter for 2024 with its overall revenue reaching US$9.56 billion, the world's biggest streaming giant has struggled to scale their advertising business, which is a growing concern as most predict Netflix's user growth will slow in the upcoming 12 months, making it even more crucial to generate revenue from ads. 

"Netflix’s ad inventory has been in market for one-and-a-half years but has struggled to get on media plans because of its premium pricing," says Jing Ying Wong, senior consultant at R3.

At present, Netflix's ad pricing can range from almost two to 10 times more than any other CTV or OTT ad inventory. "Advertisers are not yet convinced about the trade-off between quality of audience and paying such high CPMs and will need a lot more persuading," adds Wong.

But it's not just the pricing. Crucially, Netflix hasn't delivered as many ad impressions as it said it would. Since launching the ad-supported tier in November 2022, they have fallen short of ad-supported viewership guarantees by as much as 20%. 

According to Digiday, at one stage Netflix was even returning funds to advertisers. “They can’t deliver. They don’t have enough inventory to deliver. So they’re literally giving the money back,” one agency executive told the publication.

A shift to free ad-supported plans

As it searches for new methods to grow its viewership and expand its advertising inventory, there's been speculation that Netflix would offer free versions of its streaming service in a few regions, specifically Asia and Europe. They have already experimented with a free tier trial in Kenya, which hints at their exploration of the freemium model to attract new subscribers. 

"Rumours suggest a rollout of a free, ad-supported tier with a limited content library and fewer features, targeting price-sensitive markets facing fierce competition or subscriber plateaus," says Ori Gold, co-founder of Bench Media.

Statista reports predicted ad revenue surpassing ad-subscription revenue in key regions by 2027, and another report forecasts a surge in global AVOD subscribers, with the EMEA region potentially overtaking North America by 2026. 

"We believe that a freemium ad-supported tier will be a success for Netflix in Asia," says a spokesperson for Samba TV. "Most markets around the globe are hungry for cheaper alternatives to expensive paid subscription services, and with targeted, relevant ads the viewing experience will not be overly disrupted for most customers. This will in turn reduce churn, as customers are less motivated to cycle through subscriptions in order to cut down costs, and ultimately increase subscribers for Netflix."

Yet, despite predictions for a free plan from the advertising community, Netflix has confirmed to Campaign that they have no plans to introduce a free plan anywhere. Their commitment to growing their ads business in markets like APAC is instead reflected in their growing in-house team.

"Ad dollars follow eyeballs, and TV viewing across APAC is increasingly shifting from linear to streaming," says Mitchell Kreuch, senior director, head of ad sales, Netflix APAC. "Netflix is a leader in streaming engagement, and the engagement of our ad plan members is strong in APAC. We are excited to continue building out this business and we’re making good progress, growing our local team, and focusing on the areas advertisers tell us matter the most.”

To further grow their ads business, Netflix told Campaign that they plan to launch an in-house advertising technology platform by the end of 2025. This will give advertisers new ways to buy, new insights to leverage, and new ways to measure impact. Netflix will also expand its buying capabilities to include The Trade Desk, Google's Display & Video 360, and Magnite, who will join Microsoft as the main programmatic partners for advertisers.

Turning on ads for all viewers

Already we saw in Q1 2024 that Netflix added the most subscribers of any streaming platform, which was certainly impacted by the launch of its ad-supported tier. At present, 40 million people worldwide use Netflix's ad-supported plan each month, up from five million a year earlier. In countries where these tiers are available, the ads plan accounts for more than 40% of all new members. 

However, in terms of sales and viewers, Netflix's ad-supported tier in the US is far less than that of Disney+ and Amazon Prime.

Netflix has taken a more cautious approach to introducing ads. Amazon and Disney, for example, just turned ads on for all viewers and informed them they had to pay more to avoid commercials, whereas Netflix enabled customers to choose what they wanted. Although Netflix took a customer-friendly approach, Amazon's strategy immediately attracted a larger audience.

Industry leaders report that over 75% of Prime Video viewers currently watch with ads. Additionally, Amazon has lowered its fees for advertisers, undercutting its rivals and making them scramble. Disney also engages in this practice.

"Netflix's customer-centric approach of offering an ad-free tier as a cheaper alternative stands in contrast to Amazon Prime and Disney+ models, which prioritise advertising revenue by making it a default," says Bench Media’s Gold. "While this might seem like a disadvantage, it's important to consider the context. Unlike Amazon Prime and Disney+, whose streaming services are add-ons to older core revenue streams, advertising is new territory for Netflix, potentially disrupting their core product and user experience. This cautiousness makes sense, as they have more to lose in terms of subscriber satisfaction."

Netflix may have been right to take a slower approach. There have been risks with both Amazon and Disney's strategy of activating ads across their entire inventory.

"While this approach grants immediate access to a large audience pool for ad monetisation, it has also led to negative consequences, evidenced by Disney+ losing millions of subscribers in the second quarter of 2024," says Jay Kim, director, analytics and platform solutions, APAC at Nexxen.

"Amazon's situation is different due to the bundling of Amazon Prime delivery and shopping with their streaming services, which may cushion the impact of ad-supported content on its viewers compared to Disney,” he added. "In contrast, Netflix's approach of offering options for viewers is likely to mitigate the loss of its premium membership base. The key will be to retain and reinvest the additional revenue from advertising into providing more exclusive and attractive content, thus maintaining, and potentially expanding its subscriber base."

Live events and sports

Among the ways Netflix has been trying to find a faster way to generate more advertising inventory has been by pushing into sports and live events. They've already begun dipping their toes into live events like the ‘Netflix Cup’ (golf) and securing broadcast rights for WWE's Raw and some NFL games.

"Will this move generate more money? Very likely but considering the bidding wars to acquire the rights to live events and sports, it just feels like a race to the bottom," says Gavin Chew, head of media at Orange Line. "It's difficult to gauge how impactful this would be considering that every other streaming service is trying to compete in the same way and it just feels like more saturation."

With hundreds of millions of subscribers, Amazon and Netflix have bigger audiences than any single broadcaster, offering sports rights holders a fully scaled and single distribution point. Yet, as rivals like Amazon and Apple have been aggressive at acquiring sports rights, Netflix has so far been more cautious. 

“We’ve not seen a profit path to renting big sports,” said Sarandos, Netflix co-CEO and chief content officer, speaking at the UBS Global TMT Conference in New York. “We’re not anti-sports, we’re just pro-profit. He pointed out that Netflix can get “twice as big without sports”, referencing more than 100 million viewers of Squid Game.

However, as the subscriber market stalls, sport will now likely be the next content frontier for Netflix as they look for new ways to expand. 

"With Netflix expanding into this traditionally linear television domain, I believe it’s aiming to capture a larger share of the ad market, leveraging its substantial global subscriber base," says Kim. "Netflix's strategic expansion into live events and sports is a deliberate move to enhance user engagement, maintain its existing subscriber base, and capture market share from established industry leaders currently dominating the live events and sports broadcasting sector."

Other than Netflix's current paid for ad-supported tier and rumours of a free ad tier in some markets, advertising executives believe it is inevitable that Netflix will introduce ads to its most popular current tier in the future, but there are no current plans to enact this. 

Will traditional TV broadcasters be able to compete?

Now that the streamers are more frequently switching from subscription models to chasing advertising revenue, what will this mean for the ad industry overall and will traditional TV broadcasters be able to compete?

The rise of ad-supported streaming services presents a significant challenge to traditional and local TV broadcasters, as their last stronghold—advertising revenue—is now being heavily contested by the streaming giants. Local broadcasters face an uphill battle in defending their position.

"We’ll probably see increased government intervention aimed at protecting them from these global tech companies, similar to existing antitrust laws or those focused on competition and data privacy," says Gold. "However, this strategy might be difficult to implement considering that many local broadcasters are already partially owned by global media companies as well."

Nonetheless, this change offers advertisers a huge potential in terms of worldwide ad revenue. Streaming providers are starting to offer high-quality, targeted video spots at lower entry barriers than traditional linear TV advertising. 

"This shift among major streaming platforms is an inevitable trend as these giants reach growth maturity and seek new revenue sources," says Kim. "This development will create new opportunities for the advertising industry, with brands and agencies likely to redirect their investments towards these emerging players, capitalising on previously untapped inventory and audience reach."

Meanwhile, traditional TV broadcasters must prepare to compete with these market entrants. 

He added: "Offering a diverse range of exclusive content and securing the exclusive coverage rights to major live and sporting events will be crucial for their success in the face of increasing competition from streaming services.”