Digiday reports that Netflix is returning money to advertisers as a result of a lack of inventory supply. In other words: Netflix doesn’t have enough impressions available to fully deploy advertisers’ money.
Netflix had forecast 4.4MM subscribers to its ad-supported product tier by the end of 2022 when it approached advertisers this fall; given the fixed-CPM pricing (versus auction-driven pricing) of Netflix’s advertising offer, as well as the high minimum spend commitments it required, it’s reasonable to assume that Netflix has fallen short of this subscriber estimate. If this is true, it means Netflix expected to have more advertising inventory available than it does currently and onboarded too much demand as a result, which is why it is returning advertisers’ money.
Ultimately, I think this episode is a small hiccup in what was otherwise an extraordinarily impressive go-to-market operation that brought Netflix’s ad-supported tier to life in just 8 months — from a rumor in March 2022 to a live product in November 2022. Netflix’s advertising business will evolve over time, and a miscalculation in inventory supply (which is to say, users and / or engagement time) is not an indication that the endeavor will not be successful. If anything, this supply-demand mismatch proves just how much demand exists for the inventory from advertisers.
- Some proportion of potential customers are perfectly elastic: there is no price above $0 that they would be willing to pay for a product. These users cannot be recruited to products through discounts or trade-offs with ads. They will simply not adopt a product if they must pay to use it. My sense is that Netflix underestimated the size of this group of customers, having expected to recruit more non-customers to the ad-supported tier than it did;
- Some proportion of current customers are very elastic in terms of how they value their time with respect to advertising: there is no price discount (or only a very extreme price discount) that they would be willing to accept in exchange for having to watch ads. These users cannot be recruited to an ad-supported tier absent very large or total price discounts. My sense is that Netflix also underestimated the size of this group of customers, having expected to transition more existing customers to the ad-supported tier than it did.
These are important lessons. I argue in this piece that Netflix was using an ad-supported tier to drive subscription growth, given that its ad-supported tier was introduced at a lower price point (a $3 discount) than its existing tier, the price of which did not change. This contrasts with what I believe to be Disney’s motivation with an ad-supported tier, which was to increase ARPU, given that its ad-supported tier was introduced at the old price of its existing product, with the existing product’s price being raised by $3.
Netflix may have expected to recruit more new customers than it did, or it may have expected to transition more existing customers to the ad-supported tier than it did, or some combination of the two. Either way, it overestimated the number of users it would find for its ad-supported tier at launch — potentially as a result of its commitment to keep the ad-supported tier ARPU neutral.