Will AVOD create a brighter future for Netflix?

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Between April and July 2022, Netflix lost nearly a million subscribers, the biggest loss in its history. It was the streaming platform’s second consecutive quarter of declining subscriber numbers; after years of what seemed to be unstoppable growth, this was a dramatic change in fortunes. The decline is largely down to a shift in lifestyle after the pandemic, alongside the introduction and development of competitors such as Amazon Prime and Disney+. Whilst Netflix subscriber numbers remain significantly higher than those of its competitors, its share price plummeted by more than 60% as a result of falling confidence in the platform. It was apparent that it needed to take action in order to remain a leader in the sector. In an attempt to achieve this, the platform introduced an ad-supported membership tier, the first time Netflix ventured into AVOD since it began streaming in 2007.

What can I expect from the new Netflix AVOD tier?

Netflix Basic with Ads is an ad-supported subscription which comes at a lower cost to the consumer but means that ads will be shown before and during most shows. Ad load will average approximately four minutes an hour, and roughly 5-10% of TV shows and films will not be available on this tier due to licensing restrictions. Downloads are also unavailable. In the US, the Basic with Ads membership costs $6.99 a month ($1 cheaper than the Disney+ ad-supported platform launching next month), in comparison to the standard membership which costs $9.99 per month. The ad load is lower than Hulu’s, which has around five minutes of ads in a single 22-minute episode, and is on a par with HBO’s.

Cheaper for consumers, expensive for advertisers

At launch, Netflix claimed to have almost sold out all ad inventory following ‘overwhelming interest’ from global advertisers. Some media agencies have been hesitant when discussing buying space to advertise on Netflix. Ad space on Netflix’s AVOD platform does come at a premium, with a CPM of $65. This price point is around the same as that of a premium spot on broadcast TV. That makes Netflix one of the most expensive platforms on which to advertise, although its pricing is expected to drop once the initial launch period is over. Not only is it expensive, but Netflix is also asking for year-long contracts upfront and for advertisers to commit quickly, which is off-putting for some.

Room for improvement

Agencies have also suggested that the platform is not yet sufficiently well developed to warrant these price levels and that seeing how well the service works will be imperative prior to committing to placing shows. Whilst Netflix has ‘very tight frequency caps’ that will restrict the number of times an ad will appear for an individual viewer, the platform’s targeting and measurement still need work.

Many industry insiders have remarked on the fact that Netflix’s targeting capabilities are not in line with the prices they are charging. In response, Netflix has confirmed that in the coming year they will begin working with BARB and Nielsen in order to gather the more detailed data that advertisers demand, such as show ratings and detailed information on who is watching them. Once this information becomes available, it is expected that many more brands will be interested in Netflix’s advertising opportunities.

Based on the results of a survey conducted by The Harris Poll, there is a great opportunity for Netflix and other streaming services to ensure that they are optimizing the advertising experience they are able to offer. A clear trend in the survey was that currently, ‘streaming-service ads are boring, repetitive and unpersuasive, with an overwhelming 81% of respondents stating they see the same ads repeatedly. 55% are of the opinion that streamed ads are less interesting than aired ads. Questions around interactive ads and ads tailored to the content being watched caused a more even divide across subjects. However, younger and older millennials, as well as Gen Xers, who are the most likely to be using a streaming service, were in favor of interacting with an ad if it meant the rest of the show would be uninterrupted. Since these demographics are likely to make up a large proportion of audiences, this may be a factor for Netflix to consider.

Peter Naylor, Netflix’s sales VP, has spoken out about the new path for the platform and has confirmed that this is just the beginning. Co-CEO Ted Sarandos even stated that ads on the platform would be ‘better than TV’. Shoppable ads, multi-screen viewing and collaborating intensely with Netflix creators are some of the ideas on the table for the future.

A change in fortunes

According to AdAge, Netflix is expecting its foray into AVOD to generate 500,000 subscribers by the end of the year. The introduction of the cheaper subscription has come at the perfect time: with the cost of living rising globally and the festive season around the corner, households are certainly looking for ways to cut spending. Having gained 2.4 million subscribers in the third quarter as a result of strong new content, in particular ‘Stranger Things 4’, Netflix share prices rose by 14%.

A change in focus

Going forward, Netflix is eager to steer investors towards focusing on revenue rather than subscriber numbers; to encourage this, they will stop forecasting subscriber numbers. The rationale behind this is that whilst focusing on subscribers during early growth was helpful, now that there is such a wide audience who can be paying a range of fees, the economic impact of a consumer can vary, so revenue is a more important metric. It is no wonder that Netflix is trying to shift the focus to revenue, with potential new subscription fees coming in as well as a predicted $830m from ads next year.

AVOD will help Netflix to reinforce its leadership

Alongside the introduction of the ‘Basic Ads’ membership, Netflix is planning to crack down on password sharing as we go into the new year. It will now allow people sharing their accounts to create sub-accounts to pay for family and friends to use theirs. So whilst this may not increase the number of subscribers, revenue will increase. Netflix continues to lead the streaming industry by innovating and discovering ways in which to maximize viewership, whilst remaining as accessible as possible. This should help to future-proof its business model and allow it to remain a worthy competitor of the likes of Disney.

Content is still everything

Embracing AVOD will undoubtedly help Netflix to bolster its bottom line, but it’s not the be-all and end-all. For Netflix and all its competitors, a successful future lies in the quality of the content it creates. The content is the product, and subscribers will only pay the subscription for content they enjoy – with or without ads.

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