“Never say never, but it’s not in our plans.”
That’s what Netflix CFO, Spencer Neumann, said in March of this year when asked about the potential for ads on Netflix.
He added, “It’s not like we have religion against advertising, to be clear. What we’re focused on is optimizing for long-term revenue and big profit pools, and we want to do it in a way that’s a great experience for our members.”
Yeah, about that…
Just a few months after those words came out of his mouth, news broke that ads were coming.
In reality, few people were surprised.
With a declining user base—Netflix lost nearly 1mm users in Q2—and increasing competition, they didn’t have a choice.
Initial backlash aside, nearly half of U.S. Netflix users said they’d consider an ad-supported model. They already do this elsewhere—92% of them already watch ad-supported content—so why not Netflix?
For better or worse, ads are coming to Netflix sooner than expected, and advertisers will flock to the OG of OTT.
The question is, which advertisers will dive in first and how much will they spend?
Only time will tell, but current OTT ad spending across platforms like Hulu and HBO Max can give us a pretty good idea.
Netflix Advertisers Incoming
The only realistic way to paint a picture of Netflix’s advertising future is to look for a comparison.
Unfortunately, true comparisons don’t really exist.
In today’s digital world, upstart ecosystems operate almost exclusively on ads. The rising popularity of advertising-based video-on-demand (AVOD) cements advertising’s status in the OTT world.
As a result, we haven’t seen a super-established player like Netflix drop a bombshell that ads were on their way, especially after going so long without them (remember: Netflix launched in 1997).
It’d be like Facebook waiting until 2016 to introduce ads or TikTok waiting until it hit 750mm users to do the same.
For better or worse, ad-free entertainment just isn’t a thing, and the overwhelming majority of people know that.
So, how can we determine what advertising on Netflix will look like?
Our best bet is to look at how advertisers are spending on its rivals, including Hulu and HBO Max.
So, how are current OTT advertisers spending?
Between Q3 2021 and Q2 2022, 3k companies have spent more than $1.5b on OTT ads across the major platforms.
Most of these dollars (81%) came from advertisers across ten categories: media & entertainment, retail, finance, technology, automotive, restaurants, pharmaceutical & medical, food, beauty and services.
These are the same ten categories that accounted for most ad spending when we released our OTT report in Q1 2021.
The presence of these categories once again indicates that the advertisers within them are finding a sweet spot inside of OTT’s walls. They’ll likely carry that excitement over to Netflix when ads become available.
While those ten categories have dominated for a while—and will likely continue to do so on Netflix—two of them are making the most waves: finance & real estate and auto.
Between Q3 2021 and Q2 2022, finance & real estate advertisers accounted for 59% of the total OTT ad spend.
Insurance companies, in particular, invested significantly in OTT as companies like GEICO and State Farm combined to spend nearly $100mm.
At the same time, automotive advertisers, including those for GM and Toyota, spent more than $50.3mm.
Outside of these, advertisers from quick service restaurants (QSRs)—think KFC, Pizza Hut and Taco Bell—invested more than $44mm.
Only time will tell which advertisers spend on Netflix, but based on data from the past several quarters, it’s reasonable to conclude that many will come from these same categories.
What to Expect from Netflix Ads
The day the first ad goes live on Netflix will be one of the biggest days in OTT advertising history.
That said, the big day will almost certainly be overshadowed by growing pains.
For one, users will push back.
While ads are common across OTT, including on direct competitors, Netflix users will need time to come to terms with them or accept the higher price tag. (Netflix’s ad-supported plan is expected to cost between $7 and $9.)
However, Netflix’s biggest snags will arguably come from the ad tech itself.
Although Netflix appears to be in good hands after hiring two ad executives from Snap and bringing on Microsoft as a partner, it’s still a newbie in a relatively mature ad ecosystem.
Just like users will have to adjust, Netflix teams will have to do the same as they wait and see what advertisers want.
That’ll take time, but one thing that’s already abundantly clear is that advertisers don’t want a lofty price tag.
According to reports, Netflix is looking to charge a CPM of $65.
To compare, Hulu’s CPM is reported to run between $20-$33.
HBO Max is reported to be between $40 to $49, according to ad buyers.
Sure, Netflix is synonymous with OTT and has a ton of leverage, but advertisers aren’t going to sell a kidney to get ads on their platform—at least not until it can prove itself superior to other options.
The same report also noted that Netflix wants to cap the amount brands can spend to $20mm to “ensure Netflix viewers don’t see the same brand too often on the platform.”
With Netflix feeling pressure to regain its footing and reassert itself, the potential spending cap could point to its strategy moving forward—putting its users before ad revenue. A commitment to not running ads during original movies and kids’ shows also supports this.
If these rumblings hold true, Netflix’s ad loads could be on the lighter side and the ads as user-friendly as possible.
Whether or not this happens is TBD, but Netflix has historically put its users first (that’s why ads haven’t existed until now), so it’d make sense that it’d take that core DNA and insert it into its ad strategy.
Want to learn more about the state of OTT advertising? Stay tuned for our upcoming trend report.
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