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Will AVOD create a brighter future for Netflix?

November 29, 2022 13:21 Comments Off

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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.

value@ecimm.com

Disney versus Netflix: The AVOD battle

September 16, 2022 16:03 Comments Off

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For years, Netflix was the king of the streamers, enjoying a near-monopoly of the streaming market and steady growth of its subscriber growth across the world. Recently, however, it has come against increasing competition from the likes of Amazon Prime, Peacock, HBO Max, Apple TV and especially Disney+. Disney+, The Walt Disney Company’s streaming platform, has enjoyed stratospheric growth over the last few years, and its results so far this year far outshone Netflix’s. With both platforms taking their offering to the next stage later this year by launching their ad-supported tiers within weeks of one another, we look at the state of play and explore what the war between the platforms means for advertisers.

2022: The year Disney’s long-term plan paid off

The growth of Disney+ into one of the biggest streaming platforms in the world may seem like a recent phenomenon but it is the result of a carefully thought-out, 15-year-long strategy to reinvigorate the Disney empire. Of course, there were other factors at play; a global audience primed by Netflix for streaming, and the serendipitous launch of Disney+ just as the world went into lockdown and people were eager for entertainment and relief. But content is king when it comes to winning in the streaming industry, and that has been Disney’s relentless focus since the mid-2000s. Major acquisitions have included Pixar in 2006, the Marvel Comics superhero universe in 2009, George Lucas’ Lucasfilm (including the Star Wars franchise) and 21^st Century Fox in 2019 (which included operational control of Hulu). The resulting content base was ripe for the launch of Disney+ and, with content that was so much more famous and abundant than Netflix’s, it’s not surprising that Netflix is struggling to keep up.

The rise and rise of Disney+

As already mentioned, Disney+ benefited from the fortuitousness of launching an on-demand streaming platform precisely at a time when people needed at-home entertainment more than ever before. But even taking that into consideration, its growth has been remarkable. It had reached 100 million subscribers just two years after launch, far exceeding its goal of 60-90 million users by 2024. By comparison, it took Netflix a decade to reach 100 million subscribers, despite a much less competitive market – although it was also creating that market as it went along. Recently, there have been concerns among investors that the streaming industry is slowing down – concerns that were fuelled by Netflix’s results in the first two quarters of this year. But Disney has defied these worries: subscribers to Disney+ reached a new high of 152 million in the third quarter of this year, having added a remarkable 14.4 million in the second quarter. When the Disney+ tally is added to subscriber numbers for Hulu and ESPN, the total number of subscribers for platforms owned by The Walt Disney Company amounted to 221 million, surpassing that of Netflix.

Netflix’s struggle to stay ahead

Netflix is still the single biggest streamer, with just over 220 million subscribers, but 2022 has been a difficult year for the company. Their numbers seem to be following a pattern of stagnation, losing 200,000 in Q1 and a huge 970,000 in Q2. They are of course at a different developmental stage to Disney+, and at least part of Netflix’s stagnation is down to saturation as well as other factors such as the rising cost of living and the end of lockdown restrictions. However, content is also an issue: Netflix does not have a back catalogue of the scale of Disney’s, and Disney and many other media companies are ending the licensing of their content to Netflix so they can use it on their own platforms.

Netflix’s challenges and its disappointing results earlier this year prompted it to announce that it would be introducing an ad-supported tier to its platform. This caused ripples of excitement across the advertising industry, which has always been eager to target audiences which can otherwise be hard to reach. Netflix had been planning to launch the new AVOD platform in early 2023 but when Disney+ threw its hat into the ring with a launch date of 8^th December, Netflix brought its launch forward to early November.

Disney versus Netflix AVOD: The clash of the titans

So, Netflix and Disney+ are going head-to-head with launches of their AVOD platforms within weeks of one another. This will be an exciting and transformative time in the advertising industry: a sizeable proportion of Netflix’s audience, for example, is notoriously difficult to reach via other channels. So, what will advertising on these platforms entail? As things stand, we know more about Netflix’s proposed offering than Disney+, although we do know that both are anticipated to have a light ad load, with about four minutes an hour for TV series. Disney is expected to start with 15-30-second spots, but will expand to a ‘full suite of products’ over time.

While Disney+ executives will be able to rely on the company’s past experience with advertising, both on cable TV and on other platforms it owns. For Netflix, however, this is fresh territory – although they have hired experts with plenty of advertising experience, and have partnered with Microsoft to build their AdTech capabilities.

There has been more reporting on Netflix’s proposition. In early September, ad buyers were asked to submit initial bids, with a ‘soft’ CPM of $65, well above the industry average CPM of under $20, and similar to premium NFL CPMs. Netflix is asking advertisers to make a $10 million annual commitment, but with limited targeting: during the first phase, brands will be able to buy against top viewed series and some content genres, but not against geography (except country), age, gender, viewing habits or time of day. Movies are expected to have pre-rolls only, and frequency capping will be low by industry standards – one per hour and three per day.

Challenges ahead

By launching their ad-supported tiers within weeks of each other, the two biggest global streaming platforms are going head-to-head in a new field. They are facing a difficult market: with rising inflation and the growing cost of living, consumers will be looking to make cuts, and streaming subscriptions may be seen as a luxury. Of course, the streaming giants will be hoping that the introduction of their AVOD platforms will help to mitigate this, but it won’t be easy, especially if they are to avoid cannibalization of their premium, ad-free tiers. It will be fascinating to see who plays the AVOD cards better.

This is an exciting moment for advertisers – not only will they be able to reach new audiences, but investment in the infrastructure around advertising in streaming will create exciting new opportunities and capabilities. The industry will look on with interest as the two companies lands on a defined pricing strategy – we will come back with analysis when it is available.