Of Course Netflix Will Have To Run Advertising. The Real Question Is What Will It Look Like

Yes, Netflix will need to start offering ad-supported versions. And not just because it lost 200K subscribers last quarter (0.09% of its 222MM subscribers) or because it expects to lose another 2 million subscribers this quarter or because Netflix stock is already down 23%.

It will do it because like all of the other giant American SVOD services, Netflix has a single goal: Total World Domination.

It’s already in every country in the world save China, North Korea and Syria.

And, as has been pointed out on here many times, if it wants to succeed in those parts of the world that are not the US, Canada, Europe and parts of the Asia/Pacific region, it is going to need to run advertising. Because there are billions (with a “b”) of potential viewers out there who cannot afford a single subscription service and you can’t dominate the world without them.

So there’s that and there’s no way Netflix doesn’t already know that.

If nothing else, the India Situation has brought this to its attention. (TL;DR: Netflix is struggling to gain a foothold in India where Disney’s Hotstar service, which is both ad-supported and either free or under $1, has around an 80% market share. Netflix keeps dropping its price, but is seeing little traction.)

So at some point Netflix is going to have to adopt the same Three-Tier system that everyone else is also going to have to adopt: a FAST, a subscription AVOD service (SAVOD) and an SVOD service that is ad-free (SVOD AF). The three tiers will work like a funnel as a way to drive viewers to the subscription tiers while keeping enough in the two ad-supported tiers to make advertisers happy.

The question is what will it all look like?

That’s not just a question for Netflix, it’s a question all the other services should be asking themselves too.

The Options

One likely option is that the ad-supported services (FAST and SAVOD) will look very different in places like the U.S. and Europe than in the rest of the world, where there will be many more ads as a way to offset the lack of any significant subscription revenue. (FASTs will be the rule in most emerging economies, at least for the next decade or two.)

And those ads will be optimized for mobile devices, as that is how that part of the world will watch streaming TV. (People without the means to pay for multiple streaming services also do not have the means to pay for big-screen TVs.)

SAVOD ads on previously ad-free services may be limited to something like pre-roll and post-roll, especially in the U.S. The reason—both to minimize impact and to avoid interrupting the flow of the shows not created for the easy insertion of ads. (Versus, say, broadcast network TV series, which have their “and here’s where we cut to a commercial” breaks written in.)

We will also (fingers crossed) see more innovation in the types of ad units available. This is something that has long been promised but has yet to really take off. So interactive units, single advertiser sponsorships, units longer than 30 seconds (the Brits have done wonderful things with two-minute commercials for years, creating little mini-movies that are enjoyable to watch) may all come to fruition.

Libraries Matter

As the emphasis shifts to FAST services, the various Flixes will need to pay more attention to their library content, as library content is likely to be a big part of what draws in audiences.

To set themselves apart, the Flixes owned by broadcast and cable networks will be able to rely on popular series they have rights to. Both those from years gone by (Paramount and Discovery both have advantages here) as well as older seasons of series currently running on the subscription versions of the service. (Hence the funnel effect. Get them caught up and then get them to subscribe to keep watching.)

There will likely be some original programming too. That will likely take the form of shows with a more mass-market network sitcom sensibility and/or non-fiction shows (reality, game shows, home and garden shows). These are easy to produce, lend themselves to ad breaks and are generally evergreen and thus eminently bingeable.

News And Sports

In a quest for Total World Domination, news and sports are going to matter… a lot. Because news, more than anything, is what gets people to tune in. 

And news and sports, as Needham’s Laura Martin likes to point out, are two things that Netflix does not have.

Flipping back to the earlier Indian example, much of the appeal of Hotstar (beyond the low price) is that it has rights to the immensely popular Indian Premier League Cricket, giving it a built-in advantage over competitors.

So that’s something Netflix needs to think about. How does it add news and sports around the globe? If it decides not to go that route, what does it mean? Is there a market for an entertainment-only service?

Netflix’s competitors are definitely going the sports route—Apple seems all but assured to win NFL rights—though given how expensive sports rights are, not having them may give Netflix some pricing leeway.

It’s all too soon to tell. We are, to use a baseball analogy, still in the first inning of all this. But as the focus moves to markets outside the U.S., things are sure to get even more interesting.

SIDEBAR: It is worth noting that if Putin had not invaded Ukraine, Netflix would still have its 700K Russian subscribers and would actually be up 500K subs for the quarter, which I’m thinking would have resulted in a very different reaction from Wall Street.