Netflix’s Woes Will Push Them Closer towards Making their Big Advertising Move

NetflixThe last week or so has been a bad one for Netflix. The company’s share price plunged by 26 percent following disappointing financial results and lower than expected subscriber growth. Then HBO and CBS both announced they intend to launch standalone streaming services, while ESPN also confirmed they have struck a deal to show NBA games online without the need to subscribe to a pay TV bundle (VAN prediction: once cord-cutters find themselves subscribed to a few OTT services, OTT bundles will emerge, plus many people will simply return to pay TV services, which are likely to become more customisable in the future).

Netflix executives blamed their performance on the $1 price increase the company added to US subscriptions earlier in the year (£1 in the UK), although it seems equally likely that there are also other forces at work. As the OTT market expands, the reality is that Netflix no longer seems like the miracle product that it did when most people’s only reference points for on-demand content were over-priced DVD box-sets and broadcaster VOD. Even before the spate of recent announcements, the company has been facing tougher competition from the likes of Amazon Prime, HBO Go and Hulu, not to mention the fact that broadcaster catch-up services have improved considerably over the last couple of years.

Netflix needs fresh content. Without it, the company will continue to struggle to get new subscribers on board and will eventually face a user retention problem. As things stand, the typical Netflix experience goes something like this: when you first sign up you go through a honeymoon period, during which you binge on Netflix exclusives and through the movies and shows you may have missed. However, after a few months you soon begin to realise that the incoming flow of fresh content is more of a trickle than a stream, and that much of the new content is the type of stuff you used to find in the DVD bargain bin. And while Netflix seem to be smart when it comes to doing the bare minimum in order to keep you coughing up each month, it isn’t the type of service you’d necessarily recommend to others and seems unlikely to be sustainable in the long-term.

Reality Check

So Netflix appears to be reaching a crossroads. It needs additional revenue to fund new content, but it has already found that increasing prices hits subscriber growth harder than anyone had expected. And when media companies need to look beyond subscriptions, there are a limited number of options on the table, and most — even those who publicly proclaim they’d never run ads — eventually succumb to the need for good old-fashioned-in-your-face advertising.

Such a move is seen as being inevitable by those familiar with the economics of broadcast-quality mass entertainment. A senior source from a leading European broadcaster recently told VAN, “We don’t see Netflix as a new type of product category. From our perspective, they’re clearly building out an international online pay TV service. Subscriptions alone were only ever going to take them so far and in our view it’s only a matter of time before they move into advertising.”

What would Netflix advertising look like?

Netflix is renowned for way the company personalises content, so data-driven advertising seems like a natural progression. And given the company’s in-house expertise, we probably shouldn’t rule out the possibility that Netflix could emerge with advertising technology of its own.

However, as the company’s rich data sets are often linked to Facebook profiles, a partnership with Facebook and LiveRail seems like an equally likely possibility. Combining Facebook and Netflix data would not only provide opportunities for in-stream advertising on the Netflix site, but perhaps also on third party sites, either as a standalone Netflix ad network, or as part of Facebook’s Audience Network.

Users won’t be happy of course, so ad-funded content might first have to be introduced as a bolt-on to the existing product. For instance, we might see something along the lines of an ad-funded ‘Netflix Plus’ or ‘Netflix Shorts’ being introduced, just to allow users to acclimatise to ad-funded content. Another possibility might be the introduction of linear channels where both the content and the advertising are personalised according to the individual.

The impact on the rest of the market will be interesting. Netflix’s rapid international expansion would make it a compelling advertising proposition for scale-hungry global brands, not to mention the fact that not one other player in the market has managed to successfully combine the trio of global reach, top quality content and addressable ads. Getting there first would be a massive coup for Netflix and for its increasingly concerned shareholders. Surely now we’re reaching the point where it’s not ‘if’, but ‘when’.

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