Dallas Lawrence is SVP and Head of Communications & Brand for Samba TV. Member of Forbes Communications Council. Twitter: @DallasLawrence.
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Reports this past month that Netflix is accelerating its move to an ad-supported tier have grabbed the attention of everyone in ad land searching for new ways to reach consumers across today’s incredibly fragmented and cordless consumer landscape.
The cracks in the Netflix “no ads ever” wall grew into full-blown fissures this week when outlets reported (paywall) that Netflix executives recently held meetings with Roku and Comcast leaders about supporting the launch of an advertising-supported subscription tier. The accelerated move is a welcome if not overdue shift for the leading streaming player. The move comes several months after Disney+ announced the details around its own new ad-supported tier as nearly every major streamer leans into an AVOD (advertising-based video on demand) model.
The broader industry shift toward the adoption of an advertising tier follows reporting from our company, Samba TV—which helps marketers and media companies measure and develop omni-screen advertising campaigns—that in the first quarter of 2022, the average U.S. household that subscribed to a streaming service capped their number of subscriptions at two (59% had two while the numbers drop precipitously for three or more). Consumer demand for streaming content continues to accelerate while at the same time a combination of pocketbook considerations has brought into focus the reality that consumers are simply not willing to replace one $100-plus monthly cable bill with another $100-plus collection of subscriptions. Further, studies show that nearly two-thirds of consumers believe streaming services are already too expensive.
At the same time that we see a natural ceiling forming for the number of subscriptions a consumer is willing to accept, we are also beginning to see the evolution of the streaming “cycler”—the individual who signs up for a month to binge watch their favorite show, only to cancel until they see something else of interest come along. This on-and-off-again revenue model is hamstringing growth for some streamers. As the current competition for eyeballs fuels a multibillion-dollar content war, the need to embrace an advertising model has become the only logical step for addressing a decreasing subscriber universe and ballooning content budgets.
Another and perhaps less obvious reason for “why now” is the U.S. political election calendar. Some estimates tag the amount of political ad spending for the final months of 2022 to be more than $7 billion. Ad inventory on streaming services, especially on high-quality content on Netflix, could be the most in-demand in the country.
With these two forcing factors, the remaining question is: What does the advertising future look like that Netflix and Disney+ are planning to enter and likely help shape? A future AVOD-supported streaming landscape could signal five tactical shifts important to recognize for the future of advertising.
1. Boon for connected TV ad sales: Netflix is one of the largest streamers globally in terms of both users and hours streamed. When streamers embrace an ad-supported model, it could unlock a massive amount of new inventory. In 2020, the average Netflix user watched three hours or more a day. Monetizing even a fraction of that time could create the largest single influx of ad inventory in the history of television advertising.
2. Good for adtech: Some have advanced the notion that it would take a longer-term transition period for certain streamers to build an ad sales business. The reality is that streaming platforms wouldn’t need to build a massive ad sales infrastructure out of the gate and could easily lean into their longstanding partnerships to sell inventory while they scaled their in-house capabilities. This would be a win-win for an adtech industry that is increasingly struggling with limited CTV inventory.
3. Final nail in the linear coffin: It is no secret that traditional TV is struggling. One in three U.S. households has already cut the cord. Despite this, the IAB (via Tech Crunch) found that only 18% of total video ad dollars are committed to connected TV, although it predicts that connected TV viewing will account for 36% of the total time spent on both linear TV and connected TV in 2022. What has kept the dam from busting has been a two-part challenge: a sheer lack of inventory and concern over brand safety and quality. An ad-supported streaming model solves both issues. With companies like Netflix and Disney+ leaning in with some of the most popular content on TV today, advertisers can rest assured knowing they are in good hands.
4. Freeloaders becoming revenue generators: Embracing an AVOD model could solve a massive revenue leakage problem for Netflix in particular from password sharing. Netflix has said that as many as 100 million households are borrowing passwords to access its content. By announcing an ad-supported model, Netflix could clamp down hard on non-monetized users. What this model looks like will be key to avoiding cannibalizing the subscription business. One option is to create a windowing period where new content premiers exclusively within the SVOD (subscription video on demand) service for 30-45 days. Services like Netflix would then be able to create a longer tail monetization window for their major content investments and price-conscious users who are less focused on “being first” to a show.
5. Ad revenue requiring greater transparency: For years, one of the biggest complaints about most streamers, Netflix especially, has been around audience transparency. A move to an AVOD model would force a reckoning, as any company selling ad inventory will have to open its doors to third-party measurement providers (as no brand will let a platform selling its own inventory also grade its own homework).
These shifts signal a sea-change moment is headed for television advertising. Marketers could soon be empowered with numerous new opportunities to lean into a vast amount of new streaming content that enables them to explore new measurement, targeting and creative opportunities. They should think about how they will prepare to move beyond the 30 second ad format and leverage hundreds of data points rather than be beholden to legacy metrics that limit insights to age and gender. All of these factors could substantively alter strategies and budgets in the coming years as we move to a world where all content is streamed.
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