When Netflix chose Microsoft over the likes of Comcast and Google as the launch partner for its ad-supported tier in 2022 it surprised many, but it may come as no surprise that the streamer is now seeking to bring in new partners as its ad-supported tier experiences slow growth.
As Netflix pushes its paid-sharing plan with some success, adding nearly 6 million new paid members in Q2 in a password-sharing crackdown, its ad-supported tier is plodding, causing the platform to expand seek more or different ad partners, adjust prices and innovate placements.
The Wall Street Journal reported on Thursday (July 27) that “Netflix is restructuring its advertising partnership with Microsoft a year into their deal and lowering ad prices in a bid to jump-start that fledgling corner of its business,” adding that “Some Netflix executives have been frustrated that Microsoft hasn’t sold more ad inventory, some of the people familiar with the matter said. Those soft sales and the weaker than expected ad market have so far led Microsoft to pay out the maximum amount required under the guarantee it agreed to a year ago when Netflix selected the company as its partner in launching the ad business, one person familiar with the partnership said.”
Asked to update his previous remarks about achieving a 10% ad revenue contribution, Netflix CFO Spencer Neumann said during a Q2 earnings presentation on July 19, “We believe it can be a meaningful part of our business. When we say 10%, it’s in part because we wouldn’t spend all this effort, time and energy, resource allocation, senior management focus … if we didn’t think it could be at least 10% of revenue.”
He added, however, that “there’s a lot of branded TV ad dollars that we set our sights on over time because we think we’re a great ecosystem and environment to collect that demand, but we have to prove it out over time. So [we’re] not ready to kind of increase our long-term projections from one we haven’t even really come close to getting to yet.”
Netflix dropped its $9.99 ad-free basic tier earlier in July and now offers a $19.99 Premium plan, a $15.49 Standard plan and a $6.99 Standard with ads plan. Part of the strategy there is to drive more viewers into the ad-supported plan, with visions of new revenue streams layered one on another, with paid membership and ad dollars acting as the entry-level offering.
As to how those membership mechanics are seen working over time, Co-CEO, President and Director Greg Peters said, “When we drop that basic tier, folks that would have signed up for that tier essentially sort into two tiers. They either take the ads plan, which is that really low attractive entry-level price, or they move into the standard plan. And we see that sorting.”
There’s no word on who might be brought in to enrich the ads offering in addition to Microsoft, but Netflix is tinkering with things like ad placement among its Top 10 shows and other adjacencies to appeal to advertisers by aligning with shows popular with target consumers.
Questioned about that, Peters called adjacencies “a creative way to think about how we give advertisers a different way to have essentially guaranteed participation in the most popular shows, the most popular films at any given moment on Netflix,” adding that “there’s just tons of work ahead of us, tons of opportunity … and we’re also confident that all the fundamentals are there and that we can build, over several years, a material ads business.”
Co-CEO, President and Director Ted Sarandos said TV ad buyers should consider the fact that “for nearly every week of this year we’ve had the #1 show and the #1 film on streaming,” adding that “as we put those things together, there’s an enormous opportunity as eyeballs increasingly move to streaming. And our ability to monetize it both through pure subscription and through advertising if they choose to do so is really dependent on us having the content that they’re excited about, day in and day out, week in and week out in every country in the world.”
In addition to seeking new partners and offering placement within hot programming, WSJ reported that “Netflix is offering advertisers better deals. Some advertisers agreed to pay roughly $39 to $45 per 1,000 viewers in recent ad deals, according to ad buyers. Netflix previously charged some brands around $45 to $55, The Wall Street Journal has reported.
Combined, the reworked Microsoft pact and lower prices could draw to Netflix new advertisers who previously had been on the sidelines.”
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