Why Netflix is likely to follow Amazon down the mainstream subscriber ad route

Netflix’s shift towards ads was underpinned by a strategic assumption that it could justifiably command ad rates at nearly twice the market average. However, two years of its Basic with Ads service has proved that advertising is a much tougher business to succeed in for an SVOD service than the business fundamentals would suggest. While Basic with Ads has enabled more price sensitive customers to subscribe to the service at a lower price point, its ad tier remains small, with monthly subscribers significantly below the numbers reported by the company in its May upfront presentation. It is also a defining factor for Netflix announcing its Christmas NFL coverage at the same event – big mainstream live sports events are crucial for expanding its appeal to advertisers.

SVOD rival Amazon took a different approach when it introduced advertising into its Prime Video service in Q1 2024. All standard subscribers were automatically placed on the ad-supported tier, resulting in ad engagement by an estimated 75% of its subscriber base (the remaining 25% paying the monthly additional fee to go ad-free). Amazon has also thrown a disruptive curve ball into the TV ad marketplace by undercutting the competition, driving market-share and further enhancing its advertising partner credentials in the newly consolidating streaming TV ad market. Amazon also crucially has Freevee, its own free ad-supported streaming TV (FAST) network that delivers a range of linear ad-supported channels which are free at the point of access. Netflix briefly experimented with a FAST version of its service in Kenya last year before deciding to discontinue the experimental service. Unfortunately for Netflix, the economics of running a FAST proposition (content licensing, hosting costs, marketing, etc.) are hard to justify for a pureplay streaming service – Amazon is primarily an ecommerce site, and industry leaders TUBI and Pluto are owned by diversified majors Fox and Paramount, respectively.

Crossing the ad Rubicon means never going back

With its subscription revenue growth stalling, Netflix needs to make advertising work. Short of delivering on third way monetisation models (post-subscription and advertising monetisation), Netflix must leverage its mainstream subscriber base and deploy advertising at scale. Replicating Amazon’s default roll out approach would appear to be the best way to accomplish this.

Netflix’s original USP is on the precipice of an inexorable slide towards the mainstreaming of ad interruptions into the Netflix experience. The impact of this shift on the Netflix brand will depend greatly on competitors’ immediate and long-term responses. As is explored in MIDiA’s “video churn: streaming TV’s cord-cutting moment” report, SVOD is commencing its own cord-cutting moment and imposed ads will likely accelerate this. The challenge for ad adverse consumers is to find those areas of the entertainment landscape still immune to ad exploitation. And Netflix will be banking on their inability to escape their ad-partner reach.