Netflix Ad Supported Tier Is Getting Traction

Nearly six months after the launch of their ad supported tier, Netflix
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is gaining momentum. The largest streaming video provider had one million ad supported subscribers in the U.S. within the first two months. Netflix has also begun to make their advertising guarantees to Madison Avenue. After lukewarm reviews, the streamer is reportedly looking to upgrade their ad server capabilities. Netflix advertisers are also now protected from fraud, invalid traffic and providing viewer verification, issues that have plagued digital media.

After a slow start Netflix ad tier has been gaining traction with U.S. subscribers. After analyzing their internal data, Bloomberg reported in its first two months, Netflix had one million active users. Before its launch, Netflix had projected 1.1 million by year end 2022 increasing to 13.3 million by the third quarter 2023. Industry analysts project Netflix could eventually wind up with 30 million U.S. subscribers on its ad supported tier. The U.S. is one of the 12 markets where Netflix is now selling ads. At its most recent earnings report Netflix had 74 million total U.S. subscribers with 231 million worldwide.

Early on there were reports the new ad tier was off to a sluggish start. Antenna, an analytics company, reported in its first month, fewer than 10% of new subscribers opted for the ad supported tier, making it the least popular option. Since then, Antenna reports nearly 20% of all new U.S. subscribers have signed-up for the less costly choice. A monthly subscription for Netflix with ads is $6.99. The subscription rates for the other tiers are; basic without ads is $9.99 monthly; standard without ads is $15.49 monthly and premium is $19.99 monthly. Netflix says most of the ad supported sign-ups are either new subscribers or former subscribers. Hence, very few current users have been switching to the lower cost tier.

In an email Stephanie Noris, President/Founder, NorBella says, “For price conscious consumers, those who are simply overwhelmed by the growing amount of monthly fees for streaming services, it’s a good move, as well as the ability for Netflix to upsell to higher tiers. From a media/marketing perspective, anytime we have the increased opportunity to find audiences within highly sought after content that’s a good thing for advertisers. While the initial numbers appear to be relatively low, increased competition and increased advertising options is a win, only time will tell the long-term value.”

In another turnaround, it had been reported early on that the streamer had failed to meet audience guarantees by upwards of 20%, resulting in cashbacks or bonus units irritating some marketers. More recently however, Netflix has been meeting their audience guarantees. This change comes at an important time with their first ad upfront just two months away. At its November launch Netflix said it had 100+ advertisers participating.

As its subscriber count slows and the strong competition, Netflix has been looking at revenue growth strategies besides selling ads. One of them is cracking down password sharing. Globally, an estimated 100 million households are signing in to Netflix using someone else’s password. Also, Netflix recently announced they will be adding 40 more video games to its platform in 2023 with more on the way.

Digiday recently reported Netflix may be looking to either acquire or build their own ad technology system to better serve ad messaging. Such a move would replace Microsoft’s
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Xandr. Microsoft had signed a two-year agreement with Netflix in July 2022, one month after acquiring Xandr from AT&T
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for $1 billion. At the time, the Xandr announcement surprised many industry analysts who thought Google or Comcast
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had the inside track.

Netflix has recently hired Jon Whitticom as an advisor to aid in any decision making. Previously, Whitticom had been at Comcast’s ad tech subsidiary FreeWheel. In a Digiday interview, Brian Weiser of Madison & Wall, noted both options have their challenges. “Building takes a while, but on the other hand, if you buy some other entity (with a full ad tech suite), then you’d have to abandon other revenue streams which means you’re paying for something you’re not going to get.” With Xandr relatively new to Connected TV, the ad community early on, have given Netflix mixed reviews on their ad serving capabilities.

Also, in March, ad tech companies DoubleVerify and Integral Ad Science (IAS) announced their ad verifications system is now available for all Netflix advertisers. Going forward, all Netflix advertisers will have their messages protected from ad fraud, invalid traffic, along with verification the ad is viewable by real persons and protected from any bot manipulation. Netflix, DoubleVerify and IAS had reached an agreement last October.

In a press release, Mark Zagorski, CEO of DoubleVerify, said, “Our partnership ensures that campaigns on Netflix fulfill essential quality standards that drive optimal outcomes.” In a statement, Lisa Utzschneider, CEO, IAS, said, “By launching this partnership, advertisers can invest with confidence as they look to expand their media strategies to Netflix’s premium inventory.” Also, later this year Netflix plans to introduce brand safety tools for marketers.

NorBella’s Stephanie Noris, adds, “In parallel, the cost for content has continued to increase while the challenge of fragmentation and holding onto subscribers, let alone growth, is problematic. Netflix’s subscriber growth began to slow in first quarter of 2022, and more importantly in 2022 was the decline in profit, their first in a decade. The two areas that were very publicly addressed to help to combat the decline were to reduce the significant problem of shared logins, and secondly that of an entry-level ad supported subscriber tier. Although Netflix had stated over the years they would never be ad-supported, the marketplace has evolved and its now commonplace.”