Can Netflix command premium advertising pricing?

The Wall Street Journal reports that Netflix has proactively shopped its advertising offering to potential clients, suggesting that its ad-supported tier might be launched as early as November of this year. As was announced in July, the inventory available in Netflix’s cheaper, ad-supported streaming tier will be exclusively accessible through Microsoft’s Xandr platform, which Microsoft acquired from AT&T late last year.

Some of the alleged functional details and commercial terms of Netflix’s advertising offering, as reported by the WSJ, are somewhat surprising:

  • $65 CPM;
  • $20MM annual spend cap per brand / advertiser;
  • 15- and 30-second preroll and midroll placements, with an ad load target of four minutes per hour of viewing;
  • Year-long upfront commitments;
  • Audience targeting that is limited to: Top 10 programming in the US, genre-level content (eg. Comedy), and geography.

Additional reporting from AdAge provides further details: Netflix expects the number of subscribers to its ad-supported tier to reach 500,000 by the end of 2022 (and to grow swiftly throughout 2023), audience metrics will not be provided to advertisers, and reach and frequency data will not be reported for campaigns. AdAge’s reporting on formats suggests that Netflix will offer 30- and 60-second placements and that CPMs will be priced at $60, contradicting the Wall Street Journal.

Put simply: Netflix is applying a significant price premium to its inventory relative to other streaming services — not to mention other digital advertising channels — despite offering very little in the way of targeting or measurement. I have no doubt that Netflix can command these premiums for a time. It seems eminently possible that brands will rush to be the first to advertise on Netflix given the novelty factor and the potential reach.

With this premium strategy, Netflix seeks to maximize the short-term revenue impact of its ad-supported tier. But it seems unlikely that the company would be able to command this premium once the thrill of advertising on Netflix fades. As I argue in this piece, Netflix is well positioned to utilize its recommendation technology to pair ads not only with its streaming video content but also with its mobile gaming content such that the entire surface area of its catalog of products becomes a funnel into the streaming service. Achieving this would require a non-trivial investment into ad serving infrastructure, but Netflix has outsourced all of that to Microsoft in this current incarnation of an advertising platform.

I make the case in this piece that Netflix is using the ad-supported tier to drive user growth (contrasting with Disney’s strategy of using advertising to move existing users up the price curve to improve ARPU). It’s likely that Netflix, by partnering with Microsoft, is either inviting an acquisition or simply accelerating the rollout of its ad product with the intention of building its own infrastructure in parallel. Netflix’s current approach, with limited targeting and measurement tools at a premium price point, feels untenable in the long term, for two reasons:

  • Adverse selection. Netflix will reportedly price its ad-supported tier at between $7 and $10 per month, far below the current price point of the ad-free tier. Brands are unlikely to be willing to pay a premium to reach users that are priced out of the ad-free tier for very long;
  • Attracting direct response buyers. Brand ad spend can certainly account for a significant amount of revenue at launch, but growing that revenue base will require building tools that help direct response advertisers bid against actions or assess the commercial impact of their spend.

Netflix’s brute-force, no-frills approach to launching its ad-supported tier may represent the shortest and most efficient path to quickly scaling a meaningful advertising business. But the offering will need to evolve over time if advertising is to blossom into a strategic engine of growth for the company. Bringing television advertising constraints to the digital space only works while appetite for the inventory is substantial, which may not remain true once Netflix advertising becomes commonplace. Keeping advertisers on the platform will require Netflix to converge its offering around the expectations of the broader digital marketing arena.