All you need to know about Netflix’s advertising plans

Ads on Netflix: The how, when and why of the massive change ahead

Netflix co-CEO Reed Hastings shocked the streaming world Tuesday by announcing his company’s prospective plans to launch an ad-supported tier. Hastings acknowledged during Netflix’s Q1 2022 earnings call that he had vehemently opposed ads on Netflix in the past, but the company’s recent struggles seem to have been severe enough to change his mind.

While the cat may be out of the bag, a lot is still unknown or unclear about Netflix’s embrace of advertising. Here’s what we know, and what can be read between the lines about the company’s ad plans.

Netflix won’t force anyone to watch ads. The company will be adding a new, cheaper service plan that includes advertising, but will also keep ad-free plans for its existing subscribers.

• “If you still want the ad-free option, you’ll be able to have that as a consumer,” Hastings said. “And if you would rather pay a lower price and you’re ad-tolerant, we’re going to cater to you also.”
• This dual model has been a proven success story for Hulu, which began as an ad-supported service before introducing an ad-free tier in 2015.
• Hastings specifically called out Hulu as proof that ads are working for video subscription services: Hulu ended 2021 with 40.9 million paying subscribers, up from 35.4 million a year ago.
• Hulu’s average monthly revenue per subscriber was $12.96, which is about the same as the price of its monthly ad-free tier. That’s despite the fact that Hulu’s ad-supported tier is just $6.99 a month, often gets discounted to as little as $2.99, and is also sold in a bunch of cheaper bundle configurations.
• In other words: Hulu can make as much money with an ad-supported subscriber as it does with its higher-priced ad-free tiers.

Ads are coming, but it may take some time. Netflix is famous for trialing, testing and fine-tuning features on its service, and the company frequently A/B-tests features that ultimately don’t make it into the final product. Don’t expect to see similar tests for ads, as the company seems to have made up its mind.

• “I don’t think we have a lot of doubt that it works,” Hastings said, again pointing to the fact that ads do work for Hulu, Disney and HBO. “All those companies have figured it out, I’m sure we’ll just get in and figure it out, as opposed to test it, and maybe do it or not do it.”
• We don’t exactly know yet when Netflix is going to roll out its ad-supported tier, but it may take the company some time to get everything set up and ready.
• This also means investors will have to be patient to see an impact on Netflix’s bottom line. “It would phase in over a couple of years, in terms of it being material volume,” Hastings said.

Ads are really about international growth. Netflix has seemingly hit a ceiling in North America, where it lost 640,000 subscribers in Q1. However, a more worrisome aspect of this week’s earnings report was a drop in subscribers in every global market save for Asia, where it signed up a modest one million new customers.

• International markets were supposed to be the growth engine for Netflix going forward. But the company has struggled to get a foothold in many countries, often unable to match the lower price tag of local competitors or Amazon’s deeply discounted Prime Video service.
• One interesting nugget from this week’s earnings report: Netflix acknowledged that it lost 700,000 subscribers when it suspended its service in Russia following the country’s invasion of Ukraine.
• That’s a drop in the bucket, considering that Netflix has been available in Russia for six years, while the country is estimated to have 34.6 million broadband subscribers.
• Ad-supported plans could help Netflix catch up abroad by signing up subscribers for a low monthly price, and then reaping the rewards as those international ad markets mature.
• A focus on international growth is also baked into the way Netflix approaches video ads. The company is not looking to build out local ad sales teams in each and every one of its markets, but instead rely on third parties to facilitate ad sales and targeting.
• “We can be a straight publisher ... and [get] monetized … by a range of different companies who offer that service,” Hastings said.

— Janko Roettgers

Making moves

Crunchyroll CEO Colin Decker is leaving, and longtime Funimation COO Rahul Purini is taking over leadership of the combined Crunchyroll-Funimation business as president. Sony Pictures Entertainment President Keith Le Goy made the news official in an email to staff this week, writing: “Our anime business is stronger than ever and remains a vital part of our overall strategy ... We are really excited about the growth opportunities in manga, e-commerce, and mobile gaming.”

Decker recently told Protocol about his view on what makes a successful video subscription business, arguing that it wasn’t just about producing shows. “You are in the business of deeply understanding someone,” he said. “Every aspect of their life, their point of view, their hopes, their dreams and their fears. What are you going to do to super-serve them?”

Meta’s Quest headset is getting a Ghostbusters game that is being produced by nDreams in partnership with Sony Pictures VR. There’s no word on timing or exclusivity yet, and given the Sony connection, we could expect the title to show up on the company’s PS VR2 headset as well.

Meta announced the title as part of a Quest gaming showcase event Wednesday, which also featured a bunch of other new games including Resident Evil 4: The Mercenaries, Red Matter 2 and NFL PRO ERA. Plus, Meta gave an update on a long-awaited title: Among Us VR will arrive on the Quest app store before the end of the year.

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In other news

Sony eyeing in-game advertising, too. After reporting earlier this week that Microsoft was looking into offering in-game advertising for free-to-play Xbox games, Insider reported on Wednesday that Sony is considering the same for PlayStation.

Sling TV is now led by a former cable guy. Gary Schanman previously held roles at Charter and Cablevision, so he knows a thing or two about the struggles of the pay TV industry.

The Pokémon Company consolidates. The joint venture that oversees the Pokémon franchise announced on Tuesday it would acquire Millennium Print Group, the North Carolina-based company responsible for helping it print and manufacture its hugely popular trading cards.

Spotify shuts down Greenroom creator fund. The fund, which was supposed to support creators using Clubhouse-like live audio, may never actually have paid out any money, according to Podnews.

Amy Hennig returns to Star Wars. The former Uncharted creative director is working on a Star Wars game in partnership with Lucasfilm Games and her studio Skydance New Media. Hennig previously worked on a canceled Star Wars title at Electronic Arts’ now-defunct Visceral Games.

D-Link appears to be building a wireless adapter for Quest headsets. A leaked manual suggests the new device will help with wireless streaming of PC games. What’s interesting about this from an industry perspective is that Meta is leaving it to a third-party manufacturer, clearly leaving PC VR gaming in the rear mirror.

Deezer goes public in a SPAC deal valued at $1.1 billion. The French music streaming service says it has 9.6 million subscribers.

Welcome to the mini-metaverse

If you need more proof that the term metaverse may be a bit overhyped, consider this: The other day, I got an email with the subject line “Is SaaS the mini-metaverse?” The pitch in a nutshell: Because companies do so much of what used to happen in the office on Slack and similar platforms, they’re “already getting us closer to a reality of working in the metaverse.”

The way Slack and the likes change the nature of work is an interesting topic, and I’d suggest subscribing to Protocol’s Workplace newsletter if you want to learn more. However, arguing that Slack is a proto-metaverse platform is like calling a barista a food delivery service. If you just squint hard enough, they do look vaguely similar. But then you have your coffee, and you’re left with a really bad aftertaste. Lesson learned: Tip better, and don’t believe the hype.

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