Netflix is never going to run ads - just like HBO?
Pondering whether opening that door will ever be worth it
When I was a kid, to the best of my recollection, you never saw ads at the movies.
I’m not counting reminders to buy popcorn at the snack bar, or trailers (which people have always loved). I mean real video ads from big advertisers. The movie experience was something you paid for, was considered premium, and thus devoid of advertising.
Sometime in the 1990s that changed - to a degree. Companies like National Cinema and Screenvision started placing ads on big movies screens - but only during down time while you’re waiting for the theater to fill up. Today you might see a splashy 60-second Diet Coke ad, a reminder to silence your phones, then roughly 35 trailers.
The movie business found a way to let advertising in, while keeping it in its place. While the industry has been rocked by Covid, it’s still inconceivable that movies will ever be interrupted by ads. Part of the reason why is that the cinema ads category counts revenue in the tens of millions, not billions.
I wonder if there’s a lesson here as several big companies may be contemplating whether its worth opening that ad door (the one that is very hard to close).
Over the past decade, as on-demand media has become the norm and subscription services proliferate, we’ve seen a rise in paid services that allow people (with means) to freeze brands out of their media time to a much larger degree. Who needs the radio when you can pay for Spotify? Who needs to flip around the channels during commercials when you have Netflix? And of course video games, which continue to suck up more of our collective time, have always been a largely a-free experience- very much like movies. (I’m putting mobile games in another bucket here for discussion purposes).
However, once again, following a particularly scary quarter, the chorus of ‘Netflix needs to introduce an ad-supported option’ has risen louder.
Needham analyst Laura Martin argued that Netflix is nearing a ceiling in North America, and needs to introduce a $5 ad-supported subscription offering pronto if it wants to keep growing.
Yet it says something about the ad business’ economics that most Wall Street execs seem to think that Netflix shouldn’t go, and generally don’t view advertising as having a big role in the future or streaming.
It’s worth of course, reminding ourselves about some of Netflix CEO Reed Hasting’s recent quotes on advertising:
In a letter to investors back in 2019:
“When you read speculation that we are moving into selling advertising, be confident that this is false.”
“We want to be the safe respite where you can explore, you can get stimulated, have fun and enjoy – and have none of the controversy around exploiting users with advertising,”
“We think with our model that we’ll actually get to a larger revenue, larger profits [and] larger market cap because we don’t have exposure to something we’re strategically disadvantaged at, which is online advertising against those Big Three,” Hastings said.
So this would be one hell of an about face (though this is a company that launched Qwikster and killed it in like three days).
However! Theoretically, outside of the Super Bowl, I’d argue that Netflix could create the most valuable ad inventory in history. The only other vehicle I could think of that could turn on ads and have brands drooling to this level would be Epic Games (We can table the ‘will ads ever come to Fortnite for a moment).
Ok let’s imagine what could actually happen here:
Let’s say they launched a $5 a month ad supported service in the US. Would 10 million of the 75 million subscribers trade down from $15 a month to $5? That’s $100 million lost, right?
Could they net 10 million new subscribers in a year? At $5 a month that’s $50 million, which cut the theoretical loss in half.
Netflix said in 2020 its users averaged 3 hours of viewing per day. Let’s say these new ad subscribers - the 10 million who traded down and the 10 million newbies - watch 2 hours a day.
And let’s say Netflix runs four minutes of ads per hour. So two hours of viewing a day, equals eight minutes of ads per day, or 2920 minutes of ads per year. For 200 million people, that’s 58.4 billion minutes of ads. Let’s say they charge a $40 CPM, and run mostly 15-second ads…
I’m starting to lose confidence in my sketchy media math here. Maybe you can help. The real question is does this make up for the $50 million loss? Does it drive up revenue? Could Netflix realistically sell $100 million in advertising the US? Doesn’t sound that crazy, right?
These are the questions CEOs get paid to answer.
I’m still in the ‘Netflix shouldn’t do ads camp.’ Netflix’s UI, it’s tech, it’s whole raison d'etre (that’s French for coolness) could be upended by incorporating ads. When I shift from Netflix to Hulu, it is so jarring. And that’s so much better than linear TV.
Which makes me think of another Hastings quote about advertising in his famous letter: “We, like HBO, are advertising free. That remains a deep part of our brand proposition,” he wrote.
He’s right - being ad free wasn’t just part of HBO’s brand proposition - it was the brand. It was absolutely unthinkable that HBO would ever have ads.
That is, until last, when HBO Max with Ads launched.
The world didn’t end. People didn’t scream, drop the service in huge numbers, or visibly demonstrate feeling outraged or cheated as far as I can tell.
I don’t believe HBO has said how many people have signed up for its ad-supported product. But I do know this: HBO just added 13 million subs globally, and is nearing 75 million globally.
If HBO - the company that let you watch commercial free movies in your house before anybody- can survive letting brands in -anything seems possible.