A scene from Netflix’s “Stranger Things”.
For years, Netflix has consistently said no to advertisements. Its competition doesn’t believe that position will hold.
Rising programming costs and the potential for billions in additional revenue could be too hard for Netflix to pass up, predicted NBCUniversal’s ad chief Linda Yaccarino and Peter Naylor, Hulu’s head of ad sales, at a Cannes Lions panel Wednesday moderated by The Trade Desk founder and CEO Jeff Green.
“When you have to make more programming that’s not guaranteed to be a hit, you have to spend more money, you have to build your brand, you have to help the consumer discover your stuff — the price will go up for the subscription, and it would be logical to mitigate those increases to take ads,” said Yaccarino, the chairman of advertising sales and client partnerships at NBCUniversal.
Just how an ad-supported Netflix might look is unknown. Theoretically, Netflix could borrow a page from the playbook of Hulu (and soon AT&T’s WarnerMedia) and offer a version of its subscription-based service for a discount with ads. Or, Netflix could copy the Spotify model and have a free version of its service with ads as opposed to a subscription service that may come with additional benefits.
It’s also possible Netflix could incorporate ads in a way that doesn’t mirror the traditional model of TV commercials. Netflix has already experimented with product placement, such as Coca-Cola’s New Coke re-release on its hit show “Stranger Things.” Future integration of advertisement is likely to come in new ways that haven’t been created yet, said Hulu’s Naylor.
“The future of ad-supported media does not resemble what we’re doing today in terms of ad load or even ad shape,” Naylor said. “It can be interactive advertising or non-intrusive advertising. I think you’re going to see a lot of innovation from all of these new OTT providers because we’re allowed to. We’re not married to the clock. Fifteen and 30-second ads were a product of linear TV. When everything’s on demand and served through an IP address, the ad experience is going to dramatically improve.”
Roughly 70% of Hulu subscribers buy its cheaper $5.99 per month ad-supported product, said Naylor. For those who don’t want any ads, Hulu also offers an $11.99 per month version.
Netflix has immense global reach with nearly 150 million subscribers — a number that could balloon to more than 300 million in 10 years, some analysts estimate.
That would give brands the ability to reach huge swaths of the population and give Netflix a new revenue stream and investor story if subscription growth peters out and content costs continue to increase. Netflix spent $12 billion on content in 2018 and risks losing shows, such as “The Office” and “Friends,” that are only licensed for a set amount of time. NBCUniversal spent more than $28 billion developing and acquiring content last year, Yaccarino said, suggesting Netflix will have to continue to increase its spend to compete with other media companies.
The comments from Hulu and NBC echo other comments from executives at YouTube and JPMorgan in April, who also thought Netflix would ultimately warm to advertising.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.