Netflix Falling Short On Ad-Supported Service

After a November 2022 launch of Netflix’sNFLX
$6.99/month “Basic With Ads Tier,” subscriber growth is much weaker than expected and some are complaining that the company didn’t do a big enough marketing push to get more subscribers in the door.

Although Basic With Ads is $3/month cheaper than the Basic plan, it is a lower quality resolution (720p vs. 1080p on the basic service) and about 10% of titles are not available because Netflix had only recently planned to go ad-supported so some contracts prohibit airing the shows with ads.

Speaking at the UBS Global TMT Conference last week, Netflix Co-CEO and Chief Content Officer Ted Sarandos said, ”There’s a bunch of legacy content in there that those deals will either flow off or get renegotiated over time. You should expect near—not complete parity, but near parity over time.”

Unlike Elon Musk’s Twitter, who has alienated many of its advertisers, Netflix is taking a soft and generous approach to the initial supporters of its new ad-supported tier. The company is not making its numbers and the typical approach is giving more ad inventory to make up for the goal that wasn’t met.

For instance, if an advertiser was sold the spot based on a projected 10 million views and it only gathered 5 million, they would simply get a free ad. Netflix, however, is refunding the balance in cash, something which is almost unheard of.

To entice advertisers to pay a very hefty CPM (cost per thousand viewers that an ad reaches) of $65, Netflix signed deals with advertisers that require them to only pay for viewers delivered, and at the end of each quarter Netflix would remit the balance in cash if audience delivery fell short. By comparison, Disney+ charges a CPM of $50 and Netflix has since lowered its rate to a CPM of $55.

Not all advertisers, however, are asking for their money back. Reportedly, most of those getting refunded are those who had an ad campaign targeting holidays and other events that were Q4 specific. Other advertisers have faith that things will pick up and are rolling over their balance to Q1 of 2023.

Sarandos admitted at the UBS Conference which was held in New York that things were off to a rocky start for the advertising supported service but that, over time, it would get its footing. “Looking at the business and how we’ve done going into this, we’ve gotten into the first half of the year was pretty bumpy, for sure, unprecedented levels of competition in there of—and certainly super subsidized competition,” he said.

However, the ad-supported service has definitely been a learning experience, and since it is being rolled out in different countries which have very different characteristics, this will definitely take some time. “In 6 months, we built this ad product from scratch. Our COO, Greg Peters, just attacked this as a challenge to do what was widely viewed as impossible, to build this ad product and get it up and running. It’s up and running, and it’s delivering ads…but this is definitely crawl-walk-run,” he said.