At $60 CPM, what does a Netflix advertisement-supported subscription mean for advertisers and digital marketers?
Jobin Mathew
Obsessing over customers to unlock the extraordinary, building expertise in Product Marketing, E-commerce & Digital
Netflix's attempt to overtake Disney+
It was the year 2005. And Netflix decided it was time to enter the advertising industry with slips inserted in its signature red DVD envelopes. Netflix finally shut down its DVD ad sales staff as it focused only on streaming, but 17 years later, it is attempting to re-enter the market—with extremely high CPMs and minimal targeting and analytics.
Netflix will reportedly debut a lower-cost ad-supported tier for its streaming platform in early November, as the firm attempts to prevent the loss of more than 1 million members by 2022. Moving the debut date up to before the December 8 launch of the Disney+ tier with advertising. Earlier this year, Disney declared a highly successful quarter in terms of subscriber uptake, increasing by 15 million subscribers, but streaming-induced losses were $300 million higher than expected. Combined with Hulu and ESPN+, Disney said it had 221.1 million streaming subscribers at the end of the June quarter. Netflix said it had 220.7 million streaming subscribers.
Revenue reasoning and user acquisition
Top executives believe that offering a cheaper ad-supported tier will tap into a market of people who do not mind advertising but see existing subscription costs as excessively exorbitant.
There is also evidence from other streaming platforms, such as Hulu and Discovery+, that ad-supported subscription tiers can earn a higher average revenue per user (ARPU) than higher-cost subscription-only tiers. The ARPU is a measure used in the streaming industry that calculates how much money a company makes from each subscriber after deducting business expenditures.
They believe the cheaper tier will both attract new price-conscious customers and give those ready to cancel a less-expensive alternative. The new tier could generate $8.5 billion a year globally for Netflix by 2027. Netflix has told ad buyers it expects to have about 4.4 million customers worldwide on its ad-supported plan by the end of 2022.
Netflix advertising-powered Solution
Jeremi Gorman, Netflix's new marketing chief, is best known for converting her last employer, Snap, into an internet ad juggernaut. Gorman also played a key role in establishing Amazon's ad business, which is now the No. 3 player in digital advertising. Now, Netflix has hired her to help the streaming giant regain its growth.
According to industry sources briefed on the streamer's plans, Netflix's ad-supported strategy is expected to go live on Nov. 1 in numerous countries, including the United States, Canada, the United Kingdom, France, and Germany, according to a July investor letter. It will be a little more than a month before Disney+ Basic, priced at $7.99 per month, is available in the United States.
It's worth noting that not every Netflix subscription tier will have advertising. The current goal is for one newly released and cheaper subscription tier to be supported by advertising, with a price point of roughly USD $7-9 per month in the US market. This represents savings over the current cheapest package, which costs USD $9.99-15.49 per month. These prices will be tailored to the various currency markets in which Netflix operates, as well as the existing price points in those markets.?Netflix is keeping this a hybrid tier, meaning while the new tier will be cheaper, it will not be free, like the ad-supported streaming available on Peacock or Amazon Freevee.
Modalities of the advertising opportunities
Netflix has stated that original movie programming would be ad-free for a limited time after its premiere, as will select licenced children's material. along?with avoiding children's advertising, cryptocurrency, political advertising, and gaming.
Advertising will run approximately 4 minutes per hour of content - for reference, average commercial free-to-air TV/cable networks limit their principal channels to 13-15 minutes every hour. Netflix will also limit the number of times a single ad can appear for a user. It is also expected that commercials for movie content will be provided in a pre-roll fashion, not interrupting the watch experience.
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Partners in Technology and DSP
Netflix, which has never worked in this market before, faces difficult new technological and business obstacles. To enter this new market, Netflix announced cooperation with Microsoft to deliver advertising. The collaboration with Microsoft allayed some of Netflix's concerns about entering a new media market and provided Netflix with access to Microsoft's enormous advertising distribution infrastructure.
The tech behemoth has limited expertise with streaming TV, but it has recently created a $10 billion advertising company. While Netflix is managing discussions with film and television producers, Microsoft is speaking with many advertising agencies and technology companies. The corporations have also met with several advertising agencies collectively.
According to sources, Microsoft has requested that ad buyers submit preliminary bids next week with a "soft $65 CPM" (the cost per thousand views), indicating that the company is willing to negotiate ad costs. This is significantly higher than industry CPMs of less than $20. According to sources, Netflix's request for proposals from ad buyers will operate similarly to a Dutch auction, with the business looking to see what the market will bear. Regarding the $65 CPM that Netflix and Microsoft have proposed, ad buyers are currently in a wait-and-see mode, waiting for comments and test results from early adopters. Anything above a CPM of $20 will result in a lack of willingness to get into the pool initially.
According to one source, Netflix is currently seeking a minimum commitment of $10 million in annual ad spending from agencies. To meet the Nov. 1 launch schedule, the company aims to lock in advertising dollars by Sept. 30.
Three challenges for Advertisers: Transparency, Targeting, and Tracking.
Netflix has modified its stance on disclosing viewing data. It now has public Top 10 rankings and is a participant in Nielsen's The Gauge, a tool that examines time spent watching linear TV and streaming. While no one expects Netflix to disclose more detailed viewership for individual series (unlike linear TV, streaming is usually marketed by the audience advertisers want to reach, not the show they want their ad to appear on), some aspects are expected to become clearer. While we enter the awkward adolescent phase of CTV, dollars will flow to those partners that are more transparent.
Initially, there will be no third-party attribution on Netflix's ad-supported service. It will also have limited targeting capabilities. Marketers will only be able to target by genre or by viewers of its most popular shows. There will also be restricted geographic targeting. But in the advertising world, that isn't enough.
Then there's tracking, advertising's third rail. Marketers want as much information on who sees their ads as possible. Netflix, which has been fiercely protective of its customer's privacy and data, is unlikely to accept the status quo. However, it will almost certainly be required to offer third-party validation that advertising is being viewed and resonating.
Advertisers can celebrate
Meanwhile, advertisers are ecstatic about Netflix's move. The rise of ad-free services such as Netflix, Amazon Prime Video, and Disney+ has caused advertisers to face an existential crisis. They were concerned that TV, formerly the world's largest advertising sector, would be supplanted by non-commercial services. According to one estimate, individuals will spend 6% less time watching ad-supported videos by 2025. With the addition of Netflix and Disney+, the rate is expected to rise by 1%.
It will take years to create the comprehensive Netflix ad experience, but it will be pretty distinct.
Sources