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Thought Leadership & Enablement
December 27, 2022

Why Netflix Advertising Misses the Mark; Though It’s Not Too Late

On November 1, 2022 Netflix launched its ad supported tier. This was a high profile about face for a first mover in the OTT space - CEO Reed Hastings had announced on June 2, 2015 that “No advertising coming onto Netflix. Period” Reed Hastings used to say the biggest enemy of Netflix was sleep – turns out it was other streamers (HBO, Amazon, Disney+), the cost of content and lack of growth due to price.

Jed Schneiderman
VP & Country Manager, Canada

Let’s take a look at the growth of Netflix. 

Launched as a streamer in 2007, and it was the first of the large streamers. It launched at $7.99 with a slew of licensed movies and TV shows – Mad Men, Californication, SuperBad, Gossip Girl– before it started to produce its own content. It launched Originals in 2012 and produced mega-hits like House of Cards, Squid Game, Money Heist and Stranger Things, each of which helped to propel its growth. Growth continued until 2022 when it lost 1 MM subs for the first time (it ended Q2 2022 with 220.7 MM subs). This coincided with increased competition (Disney launched, Paramount+ launched) and there were increased content licensing fees.

All of this led to the November 1st launch of its ad supported tier. 

There are a few ways of looking at the Netflix ad-supported launch. 

  1. Market Share: Netflix market share declined in 2022. Looking at the Over the Top (OTT) market, players like Disney, Amazon and Hulu showed that there was market share to be gained via ad-supported models. (And don’t forget YouTube!). While some make fun that OTT is now just like cable TV (think paying for HBO and other premium a la carte services), consumers were willing to sign up for multiple services – 75% have more 2 or more services (Source: Brightback Report 2021). There are “cord-nevers” (people who never bought cable) and cord cutters (those who stopped paying cable and shifted to OTT services like Netflix) 
  2. Shareholders:  With stalled growth came a falling stock price. In 2022 alone, Netflix stock is down -51% (on 11/18 it was $287.98; it hit a high of $597 on 1/3).With a crowded space, Netflix was left with few options but to launch an ad-supported tier. 
  3. Revenue:  Some estimate that Netflix could generate over $2 BB in ad revenue (Source: Ampere). While ARPU is likely going to be drop, they will protect margin as some content will not be available on the ad supported tier.

So Why Did They Miss The Mark? 

For the same reason that Google and Facebook have massive ad businesses.

But this will not apply to Netflix. 

It is just TV advertising. 

Netflix knows what we watch. Netflix will pass this information to its sales agent -  Microsoft Advertising.

But Netflix will not know what brands I like; it will not know if I traveled last month and it will not know what kind of beer I consume. 

This does not have to be. 

Here is what could have been: 

Netflix could have launched several ad supported tiers. 

Here is a theoretical set of pricing plans.

Basic: $7.99 – Launched on November 1, 2022. In keeping with other competitors (Disney+: $7.99; Paramount+: $4.99), this was probably a decent move. 

About Me: $3.99 – For $4 off or 50% less than the basic plan, consumers could get a service with fewer ads. Out of the gate, Netflix said it would serve 4-5 minutes of ads per hour. With this ABOUT ME service, Netflix could ask consumers to answer questions every time they log on and in return get fewer ads. Bonus: Netflix could charge more for ads and potentially acquire more users. (This might be a stretch as rumors are that they are charging $50-65 CPMs though this may very well come down over time). 

Zero-Party Me: Similar to watch-to-earn advertising, consumers could get an advertising-free experience if they provided detailed Zero Party data. Netflix could take requests from brands, charge for surveys and research and collect data that maps to very high CPAs (think credit card and mortgage applications, and test drives for cars). 

By offering 3 ad supported tiers, Netflix could acquire more subscribers faster than competition and it could go to market with the most sophisticated data set in the market. While large players like Google and Facebook have a lot of data, Netflix could establish itself as a leader in Zero Party Data as it has the content that consumers want. 

Jed Schneiderman
VP & Country Manager, Canada

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