The Netflix Ad World’s Ultimatum: Be Bold

This week, the company revealed in its first quarter earnings report that instead of adding more than 2 million subscribers as it predicted three months ago, Netflix ended up losing 200,000. Obscured by global math is the fact that it lost 600,000 subscribers in North America. The news caused the company’s stock to fall by 25% immediately.

Hastings, it’s safe to say, has changed his mind. “Those who have followed Netflix know that I was against the complexity of ads and a big fan of the simplicity of subscriptions,” Hastings said during the pre-recorded interview with Netflix. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice, and it makes a lot of sense that consumers who want a lower price and are ad tolerant get what they want.”

Hastings went on to hint at how the company can handle how and where ads will appear, saying, “We can be a real publisher and let other people match all the beautiful ads and integrate all the data about people.”

This was a decidedly defensive way of announcing what will be a major change for both the company and its brand image among consumers as a trade-free zone. By now, we’ve heard a lot about what Netflix investors want, what Netflix executives want, and what observers think subscribers expect, but little about a pretty important constituency when it comes to ad-supported content: the advertisers. What do brands and advertisers expect from an ad-based tier of Netflix?

Hastings and the company should be thinking about how brands and ads can appear on the platform with as much daring as in its quest for original content. It may not be the ad world’s ultimatum for Netflix, but it’s close.

No stranger to brands

Just because Netflix hasn’t forced viewers to watch ads before doesn’t mean this is Netflix’s first rodeo when it comes to working with brands. If you’re old enough to remember the last season of Stranger Things, way back in the pre-pandemic era of 2019, you’ll remember the long line of brand partners who created ads and products related to the hit show. Nike, Burger King, Levi’s and Baskin-Robbins were a few of the marketers who jumped on the long-awaited return of Netflix’s breakthrough hit. There may not have been any ads interrupting the show, but there were plenty of ads around it.

The brand’s hand-holding didn’t stop there. In 2020, the streamer paired up with Ben & Jerry’s on a limited-edition ice cream flavor called Punchline to promote the Netflix comedy and the “Netflix Is a Joke” initiative. In addition to the brown butter bourbon and almond ice cream with toasted almonds and cherries, there was also an extensive telephone hotline fans could call — call 1-866-PUNCHLINE — to hear jokes from comedians Wanda Sykes, Fortune Feimster, and Aparna Nancherla.

Last year, Busch Beer made a mockumentary about a side character in Netflix’s Kevin James comedy The Crew, which was hyped by Nascar and eventually caught the attention of fans. For the 2018 hit rom-com To All the Boys, Subway teamed up with the production company to create multiple appearances that were recorded not so much as advertisements, but as a quirky obsession from a lead character. When the sequel launched, the sandwich chain teamed up again with Netflix to create a Valentine’s Day campaign tied to the new movie, encouraging fans to express their love with a sub.

The agency Observatory worked with Netflix on all of those examples, and CEO Jae Goodman says it’s premature to assume that Netflix just accepts the same old ads placed on old-fashioned ad-supported TV.

“Netflix already has the industry-leading brand partnership team, with CMOs knocking on the door to collaborate on its movies and shows,” Goodman said. “I think it’s safer to assume that ads on Netflix will be innovative in format and comparable to Netflix quality shows.”

New playground to innovate

Netflix isn’t the first streamer to have advertising. In fact, the service is basically the last streamer to embrace an ad-based version of its service. Its rivals — the ones who are part of the reason Netflix’s subscriber growth has evaporated — have already started to play around with how we see these branded messages in ways more format-appropriate than simply dropping interrupting TV-style ads between episodes. . For example, Hulu has in recent years created “pause ads” that appear when you hit that pause button, as well as a “binge ad,” which rewards you with an ad-free episode if you watch three or more episodes.

Agathe Guerrier, chief strategy officer at TBWA\Worldwide, points to Hulu as a leader in devising new ad formats like this one that take viewer thinking and viewing event into account to minimize disruption to the experience. “We’re excited to see how Netflix will innovate in placement, targeting and data sharing, form factor and depth of integration to bring something new to advertisers,” she says.

This is a theme among ad agency leaders I spoke to both online and offline about how their clients felt about this news. An exec, whose agency works with some of the biggest, most creative brands in the world, told me there’s a broader opportunity here to reframe the way brands appear in this space, and clients are already thinking about how they might fit. in there. They’re less interested in trying to guess what version of the current ad infrastructure the streamer might be using, and much more in talking to Netflix about what the future of an ad model might look like.

To make it worth it, they might even demand it.

Guerrier says that in recent years, brands have seen a renewed focus on the importance of the quality of attention rather than just the quantity. “Netflix creating an advertiser-supported layer represents a new playground to innovate in the attention-getting space, in the context of the world’s largest streaming platform and some of the world’s most iconic entertainment IP and talent.”

Elizabeth Paul, chief strategy officer at the Martin Agency — which works with brands like Geico, Old Navy and Oreo — says Netflix ideally won’t approach advertising with the Heisman Trophy stance. “If it’s grudgingly pushed out as a necessary evil, if brands have little visibility into the content they’ll surround them, or if ads only access bottom-drawer programs, it’ll be a missed opportunity,” she says. .

Chance over obstacle

With the introduction of an ad-supported tier, Netflix loses one of its key differentiators. At first glance, it looks like it’s just joining the ad-supported crowd now and facing a major challenge in figuring out what shape its infrastructure is going to take, more importantly how it all looks and feels. This is where Netflix has a real chance to differentiate itself again, this time with a new kind of advertising platform.

Rather than shutting up, Netflix should embrace — with open arms — this opportunity to partner with brands that already create content people want to watch and use it as the standard of what it sees as advertising. It’s easy to imagine exclusive Nike content making a splash.

There’s no reason Netflix can’t own branded entertainment like the Ford movies directed by Oscar winner Jimmy Chin that Disney aired through its channels to launch the Bronco in 2020. Or even the fun documentary series hosted by Oscar winner Questlove from 2022 for the Balvenie whisky, about craft and creativity, which is broadcast on YouTube.

“Iconic brands have long considered themselves an entertainment company,” says Paul. “These kinds of brands will be prepared.”

Netflix executives say they plan to launch the new ad-supported tier sometime in the next two years. The question is whether they can use that time to think deeply about how they can innovate on how viewers can experience advertising, give brands a place to push their own boundaries and make money at the same time.

Stranger things have happened.

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