It was great to be back on CNBC, talking about changes to the streaming industry business (AVOD, FTW) –I’ve previously shared our thoughts on both Netflix and Amazon’s entrances into ad-supported streaming in case you missed those the first time.
With regards to Netflix’s recent move into advertising, I’d like to share more on why this is an important and natural move in our industry.
Netflix has always pushed the media and entertainment industry forward. It showed us the future of content and distribution strategy and now will innovate in advertising because that’s their culture. They don’t know another way.
Analysts view this as a slam dunk — as long as high-value subscribers don’t trade down. I disagree – Netflix is quickly figuring out that they can win either way. Why? Netflix is the house of binge; they know what their subscribers love and they’ve got an all-star team of advertising leaders from across the industry.
Let’s talk about the drivers of this business: hours watched, ad load or ad minutes per hour (Netflix set to run up to 5 minutes of ads per hour), CPM (cost per thousand impressions) for a 30-second ad, plus any monthly subscription fee . This all adds up to a very healthy average revenue per user (ARPU). It will be a crawl-walk-run to get many users signed up for the ad-support tier.
The key is whether Netflix’s ad-supported tier can approach the subscription-only tiers (~$16-20/mo). The biggest levelers here are price and hours watched.
Netflix justifiably went to market with a very high price of $65 CPM which is significantly higher than the average for traditional TV and the major AVOD players. But you can’t sustain that premium pricing on novelty and counting eyeballs alone. Netflix will have to innovate with new ad experiences, like new formats and sponsored integrations, and by showing the kind of outcomes that ads are generating for marketers. Major marketing players like Omnicom are very leaned into advanced TV advertising and outcome based media planning.
We’ve seen very wide estimates of hours watched per month on Netflix. Best estimates are ~30-40 hours per month which is ~2-4x higher than other streamers. If ad tier subscribers come in at 22 hours a month or higher, Netflix will make more ARPU from their ad tier than from the highest priced level of pure subscription! This also gives them a more user-friendly way of cracking down on password sharing by offering a much lower priced tier for those price-sensitive customers. That is a very big deal!
And Netflix isn’t the first one to realize this massive opportunity. The ad-supported version of Disney+ is only a few weeks away. And another pivotal moment was when two of the dominant players of this ecosystem – Amazon and the NFL – jumped into the streaming ads business. At EDO, when we measured Thursday Night Football on Amazon Prime Videos, the ads generated nearly 2x more engagement per person than the average primetime TV ads. NFL always dominates our rankings of the highest impact and most valuable programming for advertising. Amazon has one of the biggest and fastest growing ad businesses — this most recent quarter it grew 25% YoY and is now above $40B annual run-rate. Why? Because they know a lot about who’s seeing ads and the outcomes being generated by those ads. That’s ultimately what every advertiser wants — outcomes and growth at a fair price.
We’re at the beginning of the next chapter of a very interesting and evolving story of not just the content we stream, but the ads we engage with. And we can’t wait to see what happens when Disney jumps in. After all, Andor – the streaming show everyone keeps telling us to watch – is going to be making its live (ad-supported) TV debut after we’ve all had our Thanksgiving dinner.