Netflix: your questions (mostly) answered

Before it set adland aflutter by saying it was considering introducing advertising, Netflix had seemed pretty much welded to its subscription-only model. It always firmly dismissed the idea of having advertising (other than promoting its own shows).

But, if recent times tell us anything, they tell us that times change.

With the cost of living making people question all expenditure, and with Netflix’s model looking less sustainable given their debt and the competition they face – plus faltering subscription numbers – Netflix has now decided that some sort of advertising tier might actually be a good idea.

But is it a good idea? And what does it mean? Thinkbox has been asked these questions and more. So here, as briefly as possible, are some answers…

Is this a surprise?

Sort of. In a relatively short period they have gone from never to never say never to yes. Netflix wouldn’t be the first subscription service to offer an ad-funded tier, though. And, given their circumstances it feels like a natural step to offer people the option of free, commercially-funded content – and TV advertising is a business model that works well.

What’s the proposition?

We don’t know much detail. We don’t know who will handle ad sales; where, when, and how many ads will appear; in what formats; what the price will be; how it will be measured…

There’s a lot more we don’t know than we do.

What we know is that Netflix has said it plans to launch a cheaper, advertising-supported version of its service. Disney has recently announced the same plan for Disney+.

When is it coming?

The New York Times recently reported the lower-priced tier could appear this year, though Netflix’s Reed Hastings has said they would work out the plan in the next couple of years.

Whenever it arrives, it seems reasonable to think that Netflix will trial the new service in a limited way to begin with – perhaps in a single country – to test the waters and learn.

Will viewers accept more advertising?

They certainly won’t welcome more low-quality advertising. But TV is the least unwelcome type of advertising; a recent study by GWI Zeitgeist found that TV came out top in terms of favourability. Generally speaking, people are happy with ads if the content is worth it and the ads themselves are made to entertain.

What does this mean for the TV eco-system?

As SVOD reaches saturation and the cost-of-living bites, advertising-funded TV, whether it is watched live or streamed, is well placed.

The big question is whether Netflix taking advertising will grow the TV market as a whole. Will Netflix ad spend come from budgets previously spent on lower-quality media, or will it move from existing TV budgets? No one can say. But you won’t be shocked to hear that we would hope it grows the TV market.

Will advertisers welcome it?

We know that advertisers are keen for more opportunities to appear in high-quality TV environments. There’s been incredible demand for TV advertising recently.

Over recent years, increased viewing to SVOD has constrained the advertising opportunity within high-quality, professionally-produced content, particularly among younger audiences. So there’s little doubt that advertisers will be keeping a close eye on what Netflix will be offering. At the end of the day, advertisers will welcome it if it offers a means of delivering cost-effective, TV-quality reach.

The recent growth in video advertising time has mainly been coming from TikTok in its social video battle with YouTube. But this is very different opportunity from advertising in TV content.

What are the risks?

A recent study by LoopMe found that 36% of UK Netflix users claimed they would cancel their subscription if it became ad-funded. 34% said they would be willing to switch to a cheaper tier that included advertising.
Netflix are experts at an ad-free environment but (unlike the broadcasters) they will have a lot to learn about creating a positive advertising environment that works for all parties. They’ll no doubt make some notable hires.

It’s also an increasingly challenging and competitive content environment going forward and broadcasters are increasingly withdrawing content they used to license to Netflix to keep for themselves.

But the main issue is the risk of Netflix cannibalising Netflix. The introduction of the new tier is supposed to be about growth, about new sign-ups, not tempting existing subscribers to a cheaper tier. It is unlikely that the new ad revenue would compensate for this migration.

How much ad revenue might it generate?

Currently, Netflix is about 10% of all TV viewing in the UK. If they offered advertising at the same minutage volume as the commercial broadcasters across all subscription tiers, we’re talking a significant amount of ad revenue – around £1 billion a year. 

But this is not an attractive business model for Netflix. The majority of their subscribers are likely to be on their current middle tier of £10.99 a month. ITV is the biggest commercial broadcaster in the UK with the highest premium due to the volume of mass reaching programmes they deliver. ITV currently make around £7 a month per ITV viewing household through advertising revenue. So you can get a sense of the dilemma Netflix faces; they won’t want to churn customers out of a regular, high paying subscription tier into a lower value, more volatile ad tier.

More likely is that Netflix will either offer a very light volume of ads across all but the highest paying tiers, or a high ad load across a new, low-rate monthly subscription, which they’ll try to use as a means of minimising total subscriber churn and enticing current non-subscribers. 

Due to Netflix’s scale, both these options could still make them a serious player in terms of ad revenue, but it’s unlikely that their relative size in terms of viewing will translate to ad revenue in the same way it does for the commercial broadcasters.

Wasn’t subscription the future?

True. It isn’t long ago that SVOD was being touted as the future model for TV. But media can be an industry often seduced by the simplicity of either/or answers.

What now seems clear is that, although subscription will remain an important part of the way TV content is funded, such is our desire for TV that a mixed funding ecology – with advertising at its heart – looks set to be the best answer to providing for viewers’ needs.

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