Netflix hints at future personalized ad experiences on new lower-priced plan

Netflix executives on Tuesday shared some more color on ambitions for the streaming giant’s first foray into the advertising space, including aims for a personalized ad experience, in future iterations of its lower-cost plan with ads that’s set to launch in the U.S. and 11 other countries this November.  

Netflix’s earnings interview came after it released Q3 results that saw global subscriber gains of 2.4 million, following two consecutive quarters of losses.

Before getting into innovations it hopes to achieve in the advertising space, Netflix COO and Chief Product Officer Greg Peters discussed pricing (which as disclosed last week is $6.99 per month for Netflix’s “Basic with Ads” plan in the U.S.) during the company’s third-quarter earnings call, saying that the consumer cost anchors on the value Netflix is delivering.

“We’re trying to work very hard to translate the dollars that they give us into incredible shows,” Peters said during the recorded video call.  

One question that’s been raised is whether Netflix introducing a lower-cost tier with ads would cannibalize its subscription revenue that couldn’t be recouped by ad dollars. Executives indicated that won’t be the case, saying that in modeling out the expected ad revenue, in combination with subscriptions for user monetization, the tier with ads will be “roughly call unit economics-wise revenue positive to neutral” out of the gate.

“And then when we look at the fact that we think this lower price, consumer-facing price, will bring in a lot more members, then we’re quite confident in the long-term that this will lead to a significant incremental revenue and profit stream,” Peters added.

Notably, he said Netflix doesn’t see a lot of members switching plans, somewhat downplaying that concern. “We see that to be a pretty sticky choice” so the unit economic basis is compared to the similar feature set on its current basic plan without ads.  

Even if subscribers do switch plans, Netflix feels it’s in a good position – although it will take time before the ad business makes a material impact on financial results.

“We really anticipate that this is going to be a pro consumer model” that will bring more members in because of the lower price and then “the economics and the revenue will be fine even if some of those consumers switch plans,” Peters said.

“When you factor in those extra members, we expect this leads to a significant incremental profit stream,” he added.  

Executives reiterated earlier comments that Netflix is taking a “crawl-walk-run” model to iteratively improve the ad-supported video service and continue to build in capabilities over the next couple of quarters that make it increasingly attractive to advertisers.

Ad demand “very strong”

When it comes to confidence in the advertising side of the business, Peters said “the initial demand that we’re seeing is very strong.”

“People are very excited about the proposition of bringing their brands and their ads to a bunch of consumers around the world that our watching our shows. They’re excited about the positioning against the incredible content and the titles that we have.”

He said expectations Netflix had in its models are coming to fruition through the actual sales process.

Demand appears to be so strong, that between Netflix and Microsoft (its technology and ad sales partner), teams are a little bit stretched, according to Peters. He said both will be expanding in terms of hiring and building to have more joint capacity to better serve additional advertisers.

“We’re turning some folks away right now, we just don’t have the go-to-market capacity to serve everyone,” he noted.  

Still, Peters acknowledged that at launch, targeting capabilities will be relatively basic, but somewhat on par with what’s currently seen on traditional TV (Netflix has said advertisers will be able to target by country and genre, while asking for demographics like age and gender at the time of signup). Part of the basic capabilities at launch are due to Netflix rolling out an ad-supported tier in roughly six months since first announcing plans, with Peters emphasizing that getting to market was a top priority.

Over time, it aims to move toward capabilities that align more with digital advertising in terms of being able to be fully addressable and fully targetable – something it expects to layer in over time. The streamer will also be very cognizant of privacy, he added, noting all data will only be used to make ads more relevant in the Netflix platform.

Some media reports have said the CPM (cost per thousand) pricing Netflix is seeking are well above industry averages, and Peters declined to comment on any specific pricing but stressed that advertisers want to reach the audience, with content helping to drive the demand and pricing it can get for ad dollars.

“I think we’ve got a very attractive offering, and that’s a combination of the audience that we have that we’re delivering to, that oftentimes is hard to access than other ways, certainly harder to access than traditional TV in many cases, and it’s a result of the incredible content we’ve got,” he commented. “Ted’s team is doing an amazing job at producing titles that advertisers want to be next to. That’s I think what you see is driving the demand and the pricing we can get.”

Netflix already disclosed plans to have limited ad loads of 4-5 minutes per hour and tight frequency capping – something the company and advertisers and brands are highly aligned on, according to Peters. When it comes to future iterations of the ad tier, Peters said Netflix wants to build on capabilities its leveraged in the past in terms of user experience innovation, particularly around personalization.

“We don’t need to think about the ads experience being uniform across all of our members,” he noted. “We can leverage the personalization capability we built in terms of titles and how we present titles, and also in terms of how we present ads.”

Innovation also extends to ad format. Peters said Netflix will work with partners and advertisers to think about what the best ad experience and native format is best suited for premium connected TV.

Helping to fuel Netflix’s advertising ambitions is the decline of traditional pay TV – as Nielsen data shows, streaming surpassed cable and broadcast for total TV viewing time for the first time in July and has continued an upward trend.

“This is what’s really fueling the cycle, is the really collapse of linear TV as an advertising vehicle, outside of a few properties like sports” said Netflix CEO Reed Hastings.

Peters noted that as of now Netflix considers itself mostly competitive with traditional linear TV and will build in more digital-like capabilities over time.

“A lot of what makes digital attractive will be part of our offering as we go,” Peters said.

Netflix enters ad-supported space as AVOD continues to grow

Netflix doesn't seem too concerned about subscribers of its premium tiers without ads dropping down to lower-cost options, but some think it's an outcome to expect. 

Nicole Sangari, VP of Entertainment on Demand, Worldpanel Division, at Kantar, noted that Netflix is joining the ad space in an environment where AVOD is continuing to grow.  In the third quarter, AVOD now reaches 28% of U.S. households – a 33% increase year over year – compared to SVOD, which grew just 3% year over year.

Sangari believes Netflix can expect some improved retention among current subscribers, as well as some revenue loss as SVOD subs drop down to an AVOD tier.

When it comes to expanding subscribers or retaining those who may have left, she pointed to price as helping, noting 2 out of the top 3 reasons for canceling Netflix in Q3 2022 have to do with money.

“These consumers are wanting to save money and are unwilling to pay Netflix’s higher prices. By offering a lower cost option, they are providing an alternative to cancellation,” Sangari said in comments via email.

RELATED: Nearly half of U.S. Netflix subscribers would consider ad-supported tier, survey says

Aside from those would-be cancelers, Sangari thinks Netflix can expect a portion of current subscribers to drop to the lower-priced tier.

“As prior analysis has shown, platforms that offer both SVOD and AVOD (such as Hulu, HBO Max, or Paramount+) on average see roughly ¼ of their SVOD base trade down to AVOD in a 3-month period,” she noted.

Still, Sangari said Netflix has certain strengths that could make it more competitive compared to other services with similar offerings.

“Platforms that have higher subscriber satisfaction with the quantity of both original content and new release films tend to see lower trade-down figures,” she wrote. “Netflix has high satisfaction in both areas, and therefore may be safeguarded from a high volume of trade-down subscribers.”