Your browser is not supported. Please update it.

12 May 2022

Netflix has six months to build AVoD arm – mission impossible?

Netflix will begin its contentious pivot to advertising as an alternative revenue stream from Q4 2022. In one of the greatest U-turns of the streaming era, the SVoD king will have to trade its fierce trendsetting status for a laggard wading into a marketplace where its vulnerabilities are waiting to be exposed by the competition.

According to the usually reliable New York Times, an executive note has been pinged to Netflix employees warning of this accelerated timeline for its ad-supported business before the end of this year. This is more than a slight acceleration – dramatically pulling forward plans that co-CEO Reed Hastings only recently said the company would “figure out over the next year or two.”

The message mentions that most of Netflix’s big US competitors have either planned to introduce ads or are running full steam ahead with ads to complement subscriptions, citing Apple, Disney, HBO Max, and Hulu, as per the NYT’s two anonymous inside sources.

“Yes, it’s fast and ambitious and it will require some trade-offs,” states the intercepted note.

By trade-offs, we assume Netflix execs are alluding to the $70 billion that has been wiped off its market cap in the weeks since its first quarter results which exposed a loss of 200,000 subscribers. Trade-offs could also be referring to changes on a personal level, warning employees that an ad-supported Netflix could mean sweeping changes to how departments are run.

This could even go as far as lay-offs, to pay for the extensive new advertising team that it will require – from high-profile executives with extensive experience, to battle-hardened ad sales and marketing people, and not forgetting the best ad tech stack developers that money can buy. It will also need a dedicated data team for targeted advertising and an aggressive path to programmatic inventory.

Netflix may choose to align these teams and technologies closely with its existing SVoD operations, although there is certainly a case for keeping them separate, at least initially, to minimize disruption.

To execute all this in such a short period of time – less than six months – is almost mission impossible. Even if Netflix nails the technical processes of AVoD, we feel the rapid shift in strategy could risk inter-departmental rifts.

Netflix is renowned for its in-house technological developments, from its work on video compression and CDNs, to machine learning, recommendations, and analytics, but Netflix cannot go it alone in the unforgiving world of ads.

This is why Netflix is in discussions with California-based ad-buying platform The Trade Desk, according to these same NYT sources. Having former Netflix CFO David Wells on The Trade Desk board is the sweetener here, much to the disappointment of any other demand-side buying platform vendors hoping for a foot in the door at Netflix.

Of course, if the organization’s foray into ad-supported streaming proves fruitful, there will be plenty more lucrative Netflix contracts up for grabs as it scales its buying power globally.

Besides, it is perfectly normal for a content powerhouse to recruit more than one demand-side platform for programmatic inventory, for example to provide transparency over ad order and age-specific advertising rules.

Netflix has a reliable supplier in The Trade Desk, which processes some 800 billion ad impressions on a daily basis, working with pretty much every ad-supported network you can think of. One recent example is becoming the first ad exchange to programmatically integrate Fox’s VoD inventory.

The sensible option will be to introduce the new ad-supported tier at a price point of around $10 a month, in line with HBO Max’s ad-supported offering. The more aggressive option, which we hope Netflix takes, would be to undercut the competition in a big way to see how the market responds.

By starting low, this would allow Netflix to incrementally increase pricing once momentum picks up, although that evokes memories of how the live streaming skinny bundles – like Sling TV and YouTube TV – went to market priced way too low, and caused consumer uproar when prices were raised to level required to turn a profit.

Who knows, Netflix may even throw a curve ball by offering its ad-supported option totally free (albeit unlikely).

We shouldn’t forget that Netflix is still the out-and-out market leader in SVoD. It can afford to be aggressive and throw its weight around. Advertisers will be flocking to the platform and paying a premium, soon forgetting that Hastings and co. were ever vocal critics of advertising.

The NYT’s note that keeps on giving has also fleshed out additional details on Netflix’s password sharing monetization plans, with higher charges being introduced for active password sharers also around Q4 this year.

NYT sources weren’t in a position to provide guidance on by how much prices might be hiked, but it’s likely the $15.99 monthly standard tier could reach $20 for password sharers. This is guaranteed to cause cross-state family arguments and trigger an initial spate of cancellations, but it might also normalize subscription bill-splitting akin to what friends might do in a restaurant.

Plenty of users do that already, considering that Standard gets your two simultaneous screen and Premium ($19.99) gets you four simultaneous streams. Against this background, the password sharing crackdown has been a difficult pill to swallow, with Netflix essentially charging subscribers more for something many will feel they are already entitled to with current subscriptions – multiple screens regardless of postcode.

These plans are also an acceleration from guidance provided during Netflix’s earnings call just weeks ago, when execs said password sharing monetization mechanisms would take “a year or so of iterating.”

From the cherrypicked snippets of this small but powerful note delivered into NYT hands, we feel important details have been conveniently omitted by sources. The part on “trade-offs” is a particular eyebrow-raiser, with connotations that seem world’s away from those paraded in Reed Hastings’ book, No Rules Rules: Netflix and The Culture of Reinvention.

The co-authored business book published in 2020 is exactly what it says on the tin – a tale of workforce liberation masquerading as a vanity project.

The argument is that Netflix was propelled to the award-winning big leagues by allowing people to work when they want, how they want, take holiday when they want, and be paid whatever they want, with the caveat that they deliver absolutely perfect results on time.

Only because of this culture has Netflix been able to reinvent it so successfully, or so the story goes, although we feel that segueing from SVoD to AVoD represents a bigger challenge for Netflix than its fabled pivot from DVDs to the world wide web.