ANALYSIS - The big unanswered questions on Netflix’s advertising adventure

Chris Pash
By Chris Pash | 18 October 2022
 
Credit: Ante Hamersmit via Unsplash

Netflix has “hundreds” of advertisers booked for the November launch of its advertising-supported platform including automakers, travel and luxury brands.

The streaming platform so far has refused to go public with its rates but one report says Netflix floated ad prices of $US65 per thousand impressions (CPM), a level nearing the outer atmosphere. 

Media industry insiders say we don’t yet know the takeup for this cheaper ad-supported subscription tier, at $10.99 a month, currently pitched at $4 less than the basic package in Australia.

This makes it hard to determine whether or not the above reported charges for CMP is a high water mark and whether or not that represents value. 

However, JPMorgan analysts estimate Netflix could pickup 7.5 million subscribers to its advertising-supported platform in 2023 in North America, and gain $US600 million in ad revenue.

The market certainly likes the move to advertising in response to stalling subscription growth. Netflix shares jumped 5.3% after the announcement that it would start services next month.

Feedback from agencies is mixed. Analysts at investment bank Jefferies: “Most agencies welcome the additional inventory made available by the ad-supported tier but there are questions around: how big the NFLX AVOD audience would be, price/CPM (apparently fixed price, not auction), and whether viewership data will be provided to agencies (like BVOD from Virtual Oz).

“Some agencies like the ad-funded tier as they could target kids and younger audiences.”

And advertisers, reportedly, aren’t holding back. Jeremi Gorman, the president of Netflix’s worldwide advertising and a former chief business officer at Snap: “We are nearly sold out of inventory.”

Netflix isn’t disclosing CPM “at this time” but she says advertisers have been quick to reach a diverse, highly engaged audience, including younger viewers who increasingly aren't watching linear TV.

“They can also reach them in a premium environment with a seamless high resolution experience,” she told a briefing of analysts.

“It has been amazing to see the overwhelming interest in our ads. I'm pleased to say that we will have hundreds of advertisers worldwide for launch from major automakers to CPG companies, leading travel, retail, and luxury brands.

“We built our ads products to ensure that advertisers have an incredible experience as do our members. We want our advertisers to know that they can reach the right audience and control the type of content their ads appear on.”

At launch, Netflix isn’t offering fine targeting but broader capabilities by country and content genre.

Advertisers can choose from action, drama, romance, sci-fi and more or target top 10 shows.

And ads can be excluded from appearing with content with which they may not be consistent with brand such as sex, nudity or graphic violence.

Australian media analyst Steve Allen, Pearman's director of strategy and research: “BVOD is the fastest growing sector of our media markets presently.

“We have analysed and written extensively on BVOD and SVOD this which has been the front runner and out of advertisers reach up until now.

“At the subscription pricing with cost of living about to really ramp up, we think this is a huge advertiser opportunity, especially given Netflx's model is to commission and aggressively launch blockbusters.

“However, this all comes down to CPM cost. BVOD will keep them honest but we imagine they will still look for a premium. We will be interested to see how much advertising they will let in, in what configuration. Hubris may trip them up.”

Ben Willee, general manager and media director, Spinach: “Very exciting times in the world of online video; these changes mean we have lots to learn.

“Advertising in this space is nuanced and campaign performance and optimisation will have a big impact on perceived success.

“There are some big questions that we don’t know the answers to yet including: how many subscribers will they have on the ad supported tier and what are they watching?

“There’s a lot of talk about how this will increase campaign reach and improve addressability. I’m not convinced yet. The key to good Media Strategy, Planning and Buying requires consideration, patience, and flexibility.”

Paul Wilkinson, Half Dome head of commercial: "No price point/retail messaging is allowed at this stage, so it’s a pure brand play. Political and/or gambling advertisers are also not accepted; otherwise, once established, I would expect it will become a viable platform for most brands.

"It’s absolutely an opportunity, but it’s also a challenge – and we would be naive not to look at it that way.

"Not only is it a space that has, until now, been off limits to advertisers, but it’s been actively moving eyeballs from otherwise commercially accessible platforms, such as TV, and into an advertising black hole. It’s opening up now – that’s the opportunity, the ability to reach an otherwise unreachable audience.

"The challenge comes in navigating the space, both from the point of view of an advertiser and a publisher; how do they respond to this new competitor?

"I can’t talk from the publisher side, but for advertising, I would argue it’s far too soon to go in full throttle. There are too many unknowns to treat this as anything but a component of a test-and-learn budget.

"Pricing is one of the unknowns. My understanding is a CPM of around $80 and upwards, so it’s not an efficiency play."

Wilkinson says information from Netlfix has been sporadic at best, with more questions than answers.

"Ultimately, I suspect they will be going after TV / BVOD / YouTube dollars currently on the media plan. On that basis, they will pitch themselves as a key component of an advertiser’s screen activity."

Ryan Johnstone, media director, Edge: “I suspect their CPM will be significantly higher than the current players as this is easily the biggest update in the broadcast space in recent years.

“What Netflix has over the other players is the international relevance – aligning with programs that generate talkability. Especially with the effect of TikTok – so much content is coming out of the US, and local audiences don’t want to miss out on the action/joke.

“Recently with the Dahmer series there has been a huge flow over into TikTok and social media relating to this – and if you aren’t tuning in you simply won’t understand half the content online these days.

“There’s a place for all brands on Netflix – their array of programming makes them suitable for a variety of clients. However, it will be crucial in reaching younger audiences who aren’t as engaged with our locally produced content on FTA channels and their catch-up extensions.

“One thing they should look to incorporate is requiring audience inputs when one channel has multiple user accounts within it. For example, I use my parents account with my own sub account, however all the log in data would be related to them – so from an advertising POV, you would want to be able to understand the demo of each user within the account to minimise wastage.”

Rowena Newman, PMX head of media intelligence: “Netflix's ad-funded platform brings some diversity to the total video offering in Australia, and that is always an opportunity for advertisers.

“The Netflix ad-funded platform is untested, so it’s difficult to say much about the pricing as we don’t (yet) have any insights around either the audience or the effectiveness of the platform.

“Netflix is pitching this as being consistent with the Netflix offering generally – they want to stay true to the premium viewer experience, and that includes the ads, which need to meet the Netflix standard of story-telling.

“The tight capping of frequency across the day, and the requirement for ads that tell brand stories – rather than sell – would indicate that audiences will experience ads differently on Netflix compared with other platforms. It will be interesting to see if the Netflix environment works differently to other platforms when it comes to campaign effectiveness, and audience attention and engagement.

“At this stage all we can say is that it’s suitable for brands that want to do big brand ads, ads that tell a story and build emotional connection.”

Es Chandra, Glide Agency CEO: "With the introduction of Basic with Ads, Netflix will be giving advertisers another new avenue to test video ad content.

"The new, cheaper subscription plan will be launching next month, but there are still many unknowns on how the ad platform will be set up. At this early stage, it seems it will differ from Meta, TikTok and Google, in that there won't be auction-based bidding.

"At Glide Agency, we are eager to trial the new ad platform, and will be running test budgets to evaluate performance. We see this as a further extension of YouTube ads and anticipate brands in leisure, tourism, gaming, property, home renovation and other successful YouTube campaigns to deliver well on Netflix.

"We will however discover and refine how to measure 'success' as we go. It took TikTok 12 to 24 months to hone their ad buying platform, and they still have work to do, so we do not expect Netflix advertising to be at its full capability upon launching."

"While Netflix believes they will be able to attract new users with a cheaper tier, the success for advertisers will depend on whether the new offering entices enough subscribers. One may question whether the 720p lowest level of HD streaming quality of the plan is viable in 2022, or how personalised the content will need to be to the user to make this a profitable option. Only time and testing will tell."

The introduction of an ad-supported Netflix isn’t, at least initially, expected to have an impact on other BVOD plays.

Analysts at Jefferies: “We think the impact on Nine and Seven are benign in the short term, but ad-supported Netflix, Disney+ and Paramount+ could have a longer term impact.”

Nine’s Stan may feel some heat. Jefferies: “Content becomes even more important in attracting viewers. Stan has Yellowstone S5 and Love Triangle, both could be hugely popular.

“But the launch of cheaper plans by competitors could put a lid on price increases, although as per above, NFLX could raise the prices of ad-free products in the future.

“Impact on BVOD (7plus, 9Now, 10play): we expect the ad-funded SVOD would compete for the same ad dollars currently spent on digital video advertising, estimated to be worth $3.5 billion.”

Aline Eloy, group digital director, Alchemy One: “I believe it's an opportunity due to the large adoption of SVOD in Australia. SVOD has had a significant impact on free-to-air viewing resulting in advertisers being blocked from running ads across a large portion of content.

“This opens the doors for advertisers to connect in a premium environment with minimal ads to try and aid message cut through. It will however be interesting to see the take-up of the ad-supported tier and how this evolves over the short-term future, whether this is entirely new audiences or existing Netflix audiences downgrading to the ad-supported tier.

“Netflix is launching with a fixed price CPM vs. an auction-based platform which we see changing as enhanced targeting capabilities are released into the market.

“From the rates we've seen the cost is definitely on the premium level of CTV, however, given Netflix has said that ads initially won't be skippable this is expected it will be interesting to see how this evolves, especially as more competitors enter the market in the coming months.

“At launch advertisers will have the ability to target by country, genre and Netflix Top 10. Ads will also be targeted based on date of birth and gender. I think the question that brands and agencies will be rapidly asking post-launch will be in relation to the audience difference between the subscription levels which will then help them determine the relevance of the platform within their planning.

“Whilst Netflix is the first cab off the ranks with Disney close behind we anticipate others will follow asap. Given SVOD services haven't previously provided ad-supported platforms the receptiveness to ads on the platform (even if users have knowingly opted in) will be interesting to see. Spotify is an obvious reference point, but the example also clearly outlines a difference in the audiences who would be choosing the premium vs. ad-supported tier which needs to be taken into consideration when planning as/if Netflix and the other platforms release more information on this.

“With targeting capabilities being limited in the launch phase and a number of categories restricted such as political and wagering advertising, it's fair to say that brands trialling the platform will need to have a broad message and are open to testing. To see success on the platform brands that lean into storytelling to play into the premium nature of the platform and aim to add value with their message will cut through best.”

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