Ads will not be coming to Netflix until 2023, it was confirmed today (July 19).
When Netflix's Co-CEO Ted Sarandos confirmed at the end of June that the streaming giant was indeed planning to launch an ad-supported subscription tier, he did not offer up a date for when such a tier might arrive. However, reports based on leaked internal Netflix communications had indicated that it would be before the end of 2022.
If that was the plan, it has now been pushed back, with the company now targeting the start of 2023 to launch the ad tier. This news follows the announcement that Netflix partnered with Microsoft to provide the platform for advertising on the platform, with Microsoft described as "Netflix's technology and sales partner," though some wonder if they could end up ending more.
Netflix executives confirmed the news in the company's report to investors, in which they revealed that the streaming giant had lost over 970,000 subscribers in the period up until June 30 this year.
The report details the planned launch of the tier, stating: "We recently announced Microsoft as our technology and sales partner and we’re targeting to launch this tier around the early part of 2023. They are investing heavily to expand their multi-billion advertising business into premium television video, and we are thrilled to be working with such a strong global partner."
Netflix went on to say that they will be targeting "premium CPMs from brand advertisers" and that the tier will "likely start in a handful of markets where advertising spend is significant. Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one."
CPM is an acronym for cost per thousand impressions, a marketing term used to denote the cost an advertiser pays per one thousand advertisement impressions on a web page. As an example, if a website publisher charges $2 for each CPM, that means an advertiser must pay $2 for every 1,000 impressions of its ad. Google's average CPM is around the $2.80 mark, but this statement seems to suggest that Netflix will be looking to charge more than that.
The statement is bullish about Netflix's plans for the ad-supported tier, saying: "Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners. While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth."
An ad-supported, lower-price tier isn't a revolutionary idea for a subscription service. Hulu, HBO Max, Paramount Plus, and Peacock do it already and Disney Plus will be bringing in the option this year too, but it seems like Netflix is already trying to do its own thing.
Greg Peters, Netflix's Chief Financial Officer, told investors that the ad-supported tier will be done with an "innovation-orientated view". He added: "It's a crawl-walk-run model. At the beginning, it'll be what you're familiar with, but over time we think there's a tremendous opportunity to leverage the innovation DNA we have. The scale of our offering and the partners we've got lined up, we had deliver something that's fundamentally different from linear television. Brands have wanted to connect with Netflix's content."
It's all quite vague at the moment, but it's clear Netflix has big plans for this new tier.
Analysis: A reluctant convert
Things have moved fast for Netflix in the rollout of an ad-supported tier, which will cost less per month than its current subscription plans.
Back at the start of March, company Chief Financial Officer Spencer Neumann was asked about the prospect of an ad-supported tier and would only go as far as saying that he could “never say never” when asked about the idea, before swiftly adding that it "not something in [the brand’s] plans right now."
Then, on April 20, during an earnings call, Sarandos' partner-in-crime, Netflix's other Co-CEO Reed Hastings revealed that the streaming service was then “quite open” to the possibility of an ad-supported tier and could "figure it out over the next year or two.”
Here we are in mid-July and not only are ads on the way, but Netflix has teamed up with one of the biggest companies on the planet to help them get their faster.
They're talking a good game, but the company's executives took a long time to even consider taking commercials on their platform, a fact they've acknowledged in their new investor report, writing: "At Netflix, focus remains very important to us. These initiatives - paid sharing and advertising - do introduce some additional complexity."
Back in November 2021 when Netflix shares were trading at $700 each, Sarandos and Hastings would never have dreamed that 18 months later they'd be rolling out a new tier in an effort to stop bleeding subscribers. That kind of growth was never sustainable, the Covid-19 pandemic was a nightmare for all of us, but it made streaming services a lot of money as people were pinned in their homes with nothing to do but watch television. Millions who would have happily spent their lives watching linear television suddenly had the time to become invested in streaming services. Now the pandemic is in the rearview mirror, this subscriber dropoff is a bit of course correction.
That is not something investors would be happy to hear. They want to keep those numbers up. Hence, Netflix executives are doing the thing they've never wanted to do, and letting commercials on their platform. The question is now, will it work in keeping numbers up? Or, ideally, will the commercials be sufficiently annoying that it pushes people back to become full subscribers once again.