Are ad-supported tiers too much temptation for Netflix or Prime Video to resist?
With growing competition in video streaming services, Netflix could reverse their former “no ads ever” policies. Let's look at the pressure points.
A few months ago, the internet had a mild freak out when Netflix started showing users commercials for other video content between episodes. Although Netflix described it as a small-scale experiment — the ads just promoted other Netflix shows — some users took to Twitter to announce that if Netflix began running ads they would cancel their service.
Viewers who enjoy Netflix’s programming urged the company to leave well enough alone. Many feared that the area of ad-free streaming on Netflix, and for that matter videos on Amazon Prime, was coming to a close.
Though some of the criticism was overwrought, there was a precedent for such fears: Forty or so years ago, consumers began paying for cable TV, in part to enjoy ad-free programming. But the lure of revenues proved too strong for most. Although HBO and Showtime have remained ad-free all of this time, the vast majority of cable networks haven’t.
That may prove to be the case with Netflix and Amazon too. Both could offset the huge expense of creating new programming with ads while also growing their subscriber base. Following Hulu’s lead, the streaming services could offer a free version with ads as an alternative to the premium paid version.
Netflix’s huge advertising potential
To be clear, Netflix has given no indication that it is considering running ads. CEO Reed Hastings has also intimated that advertising is not in the cards. But industry watchers have pointed out that if Netflix wants to expand its international footprint (currently 80 percent of its subscribers are in the U.S.), then it could quickly achieve that by offering a free ad-supported version.
Of course, offering advertising would bring its own troubles too. The ad business in 2019 is not for the faint of heart. There’s increased regulatory pressure being put on both Google and Facebook right now and a lot of that stems from how they monetize user data through advertising.
With that said, the marketing industry is clamoring for an alternative to the Google/Facebook duopoly. Most marketers funnel the bulk of their direct response ad spending to Google and Facebook as other channels cannot match the performance, scale and targeting capabilities of these giants.
Netflix would also likely let advertisers target consumers based on their activity on the platform. Using proprietary algorithms and machine learning, Netflix can accurately predict which content viewers will like to watch. There’s no reason why such data couldn’t also be used to serve ads to users based on the content they consume.
Amazon is a different story
Amazon is already a major player in advertising; its ad business is expected to generate $4.6 billion this year, according to eMarketer. Amazon’s “other” category, which includes advertising, grew 130 percent in its first quarter versus the year-ago quarter.
While advertising is for now just a profitable sideline for Amazon, the company has shown a willingness to experiment with what would make an ad-supported version of Prime plausible. Unlike Netflix, Amazon is also already under the watchful eye of regulators.
On the other hand, an ad-supported version of Prime would offer less incentive for consumers to sign up for Prime. “Free” shipping may be the main reason people pay for Prime, but Amazon’s formidable streaming video service is a big part of the equation. If Amazon made Prime Video access a la carte through a free ad-supported tier, it would effectively devalue a Prime membership and possibly discourage people from paying for a Prime package.
Is the temptation too strong?
In each case, the lure of huge amounts of money have changed those calculations. Saying yes to ads would certainly appease Netflix’s investors, who have been jumpy this year about Netflix’s seesawing stock price. Also, Netflix’s first-mover advantage no longer applies since it faces competition not only from Prime and Hulu but new entrants such as Disney. Offering a paid and ad-free version also has precedents in the gaming and music industries; it works well enough for Spotify.
True, Netflix would have to build an ad business from scratch, but it has already built one of the most sophisticated internal digital marketing teams and is one of the country’s largest advertisers. There are few brands that understand digital marketing as well as Netflix. This competitive advantage could serve the company well if it were to build out an ad platform.
None of this means that Netflix or Amazon will turn on advertising in 2019 or at any other point. But if I were a betting man, I’d put my money on either or both offering an ad-supported tier. Both may be able to resist the clarion call of advertising cash now, but in five years, it’ll be a different story.