Netflix targets 2023 for ad-supported tier

As Netflix reported subscriber losses for the second quarter in a row, a significant portion of the company’s earnings call was spent on plans for an ad-supported tier, which it’s targeting to launch in the early part of 2023.

In the earnings interview Netflix founder and co-CEO Reed Hastings said the streaming giant is “executing really well on the content side,” calling out “Stranger Things” and “Ozark” as well as improvements in marketing, the service and merchandising as slowly paying off.

If he had to pick one aspect that helped deliver fewer than expected subscriber losses, Hastings said he might say “Stranger Things” – Netflix’s global hit and most-viewed English-language series ever with 1.3 billion hours streamed the first four weeks.

Hastings acknowledged the company wasn’t thrilled with results that still saw subscriber losses of 970,000, but the company remains “very bullish” on streaming.

“We’re talking about losing 1 million instead of losing 2 million, so our excitement is tempered by the less bad results,” Hastings said. “But looking forward, streaming is working everywhere, everyone is pouring in. It’s definitely the end of linear TV over the next 5-10 years.”

Crawl-walk-run approach for ad-tier

Netflix plans to bring a consumer-centric approach in terms of user experience to its ad-supported tier and build up the offering over time as it applies new learnings.

Greg Peters, Netflix COO and chief product officer, said the company wants to set expectations at the onset that it will be taking an iterative or “crawl-walk-run” model over a period of years.

“At the beginning it will look like what you’re familiar with, but over time we think there’s a tremendous opportunity to leverage that innovation DNA that we have, as well as… a bunch of enabling characteristics around addressability and measurability” to provide incredible experiences for consumers on the tier and for brands and advertisers, Peters said.

He added that there are several lines of inquiry and innovation to support that piece. With Netflix’s scale, coupled with technical expertise and partners, he’s “pretty optimistic that over a couple of years we can deliver an experience which is fundamentally different from the ad experiences on linear in a way that supports all of the stakeholders.”

Netflix last week disclosed Microsoft as its partner of choice for both technology and ad-sales for the forthcoming tier.

In terms of choosing Microsoft over others (Google, NBCUniversal and Roku were all reportedly in the running at one point), Peters said there were fundamental pieces, such as complementary technical know-how and go-to-market capabilities Netflix will need to leverage, along with a strong commitment to privacy.

Beyond that “we saw a high degree of strategic alignment in their interest in innovating in this space and really working with us over the next several years to basically try and create a new ads ecosystem around premium TV, connected TV ads” both from a consumer perspective and to be able to support advertiser and brand goals, Peters said.

“We’ve seen this long arch of ad toward pro consumer, ‘let’s make advertising part of the quality of the experience rather than detracting from it,”

All ads served on the ad-supported offering will come through Microsoft as part of an exclusive arrangement. A key component of what Netflix liked about Microsoft, according to Peters, is the flexibility and innovation-orientation as the partners work together to evolve the TV ad space.

He emphasized that Netflix picked Microsoft because they think the company will be a great ad partner, saying it hasn’t changed other elements such as using Amazon AWS for cloud infrastructure – though the ad partnership doesn’t mean they can’t on potentially team up together on broader strategic opportunities if they arise.

The company has also “seen a lot of excitement in our early discussions with brands, holding companies and agencies,” in wanting to connect with Netflix content, according to Peters.

He declined to comment on specific Microsoft deal terms, specifically whether there are significant guaranteed revenue commitments over the next few years.

Netflix sees a chance to reach price conscious consumers, households that either have never subscribed to the service, canceled or those who are sharing passwords with another household, as opportunities to attract a broader set of subscribers who might be more interested if the price of Netflix is lower with ads.

When it comes to customers potentially dropping down from higher-priced plans without ads, Peters talked about the monetarization piece that complements the subscription portion of an ad-supported tier.

“We’re quite optimistic that the unit economics work to make that monetization sort of equal or maybe even better than what we would see on the comparable side for the non-ad subscription only kind of plans,” he noted. “So we think again this is expansive from a member reach perspective but also neutral to positive on the unit economics monetization.”

Content for ad-supported tier

That said, an ad-supported tier might not feature all the content found on Netflix today. Last week the Wall Street Journal reported Netflix was looking to renegotiate deals with entertainment studios so it can monetize content on an ad-supported tier.  

Asked about what needs to be done on the licensing side, Netflix co-CEO and chief content officer Ted Sardanos said much of what’s on the platform could be used in an ad-supported tier, but not everything.

“Today the vast majority of what people watch on Netflix we can include in the ad-supported tier today. There are some things that don’t that we’re in conversation with the studios on,” he said. “If we launched today members on the ad-supported tier would have a great experience.”

Netflix will clear some additional content “but not certainly all of it,” he commented, adding they don’t feel it’s a material hold back to the business.  

Spencer Neumann CFO echoed that it’s a nice to have, but not must have.

“We could launch today without any additional content clearance rights, and hopefully we can supplement that, but we’ll be disciplined in what we do,” Neumann said.