To Ad or Not To Ad: The Future of Netflix

Just two years ago, Netflix was adamant that they would never include ads on its platform. The rationale? How can they compete with the likes of Google and, then, Facebook in taking advertising market share. Instead, Hastings stated in the Q4 earnings call that his focus for Netflix is “on streaming and customer pleasure.” Hastings’ likely perception of customer pleasure in January 2020? Fresh new content running alongside your favorite existing shows, movies, and documentaries, all in an environment that allows for uninterrupted viewing. 

And, let’s be honest, Netflix, Hulu, Prime Video, AppleTV, Disney+ and other major streaming app players had a REALLY, REALLY good 2020 and strong 2021 as a pandemic roared and people were confined to their homes. But it didn’t go unnoticed. In 2020 alone, out popped two more major players, HBO Max and Peacock, and the number of OTT players in the space have only increased since then. The streaming environment is splintering, making streaming a challenge for service providers, customers, and brands alike. 

So now, we go back to Netflix’s goals: streaming and customer pleasure. Well, the streaming part they have down pat (but so do the handful of other streaming services mentioned above….). Customer pleasure? Now that’s a bit more complicated. Yes, they are continuing to offer uninterrupted viewing of programming, but they are also hiking up costs relative to ad-supported competitors, discontinuing highly popular shows with new original content to attract new subscribers, and are (finally) locking down password sharing as they see profit margins tighten. That, combined with the suspension of Netflix services in Russia, has led to steep declines in Q1 with another 2 million subscribers lost coming in Q2. 

Yes, Netflix subscribers are undoubtedly irritated that shows they like have ended and they can’t share their password with their new friends at college. I mean, look at this chart from eMarketer - only 63% of Netflix subscribers were paying the full subscription cost. Customer pleasure does not always yield business profits. There has to be a balance between the business needs and the consumer needs. 

But the larger issue goes to competition. 65% of paid video streaming subscribers in 2021 had 3+ subscriptions, with a corresponding 61% thinking they are already paying too much for their streaming services. And Netflix is the highest cost. So when I can get 2 or 3 streaming services for the price of Netflix, do I choose to keep it for the one or two exclusive shows that will likely get canned after 2-3 seasons?

Probably not. Supply goes up! Demand for a singular provider goes down…..

But if I can pay $7 instead of $15 and just have to watch a few ads (that are hopefully executed well and curated to me in the addressable environment)….now we have a debate. 

If Netflix wants to continue to play the high cost, high value content game that initially made them a leader of this space, advertising is likely to be a needed revenue stream to support those initiatives and attract new subscribers. Some attrition might still occur for those who are highly advertising adverse, but the numbers don’t lie. When 67% prefer free with ads or tiered, you should go with the masses.

We may see how this plays out as soon as the end of this year…..

I guess we will wait and see.

Written by Coegi Director of Marketing, Elise Stieferman