The move to offer an ad service of some kind was not part of the company’s script. Clearly it has been forced upon.
It is apparent that the streaming pandemic party is well and truly over. During this time, we saw a rapid increase in consumer adoption fuelling subscription revenue. Conversely during a recessionary period, users will be forced to make some tough decisions regarding the need to keep on paying or signing up to a slew of services. Adding an ad tier, helps Netflix diversify its business model further, offering something for everyone which should resonate with a broad range of users.
Arguably, this is not enough as users are accustomed to getting something for free with an ad based service (without paying for a subscription). However, it does allow Netflix to retain its proven subscription formula and the entry point of £4.99 is enough to entice users to sign up. More so when you consider the huge catalogue of programming (excluding some titles due to licensing).
Netflix’s growing subscriber base of more than 200 million will be an attractive shop window for advertisers and brands. All key stakeholders will need to work more closely to ensure users are not bombarded with spam. Also, consumers will need to brace themselves for putting up with ads on a service that has been ad free; this will be a cultural shock. We should not solely expect new users to sign up; some will downgrade or deicide to come back to Netflix. The move is as much as about retaining users as well as signing up new ones.
Fully expect some users to be frustrated and cancel altogether or even move up the pricing tiers. Managing expectations will be important by ensuring the right ads are served otherwise users will cancel. Ultimately the shift towards streaming will negatively impact linear TV networks and free-to-air broadcasters who are heavily reliant on advertising as the main revenue source. This could prove to be the final nail in the coffin for these players.
Make no mistake, this is a significant move that takes Netflix in direct competition with free-to-air broadcasters around the world. This will attract interest from entertainment shows like Strictly, The Masked Singer et al to all consider making moves towards distribution via the streamers.
Paolo Pescatore is founder & TMT analyst at PP Foresight, and can be followed on Twitter and LinkedIn.
