Two Cheers for Ads on Netflix!

December 31, 2017

Ads on Netflix? Hey, stranger things have happened.

Recently, Reddit was even rantier than usual as many users noticed unskippable 10-20 second promos — OK, let's just call them ads — sandwiched between episodes. Many vowed to cancel their subscriptions. Others noted that cable TV also started ad free but programming has since been larded with 16 minutes per hour of ads.

Cooler heads noted that Netflix has been experimenting with ads for a while now. Click on Netflix at home and you'll see autoplay previews for Netflix Originals that run until you navigate away. One intriguing possibility is that, like Hulu, Netflix will offer a premium ad-free version and a cheaper, ad-subsidized iteration. If so, that would be great, not just for Netflix, but for the ad industry as a whole. Here's why:

Pay or see ads means put up or shut up. Cable TV viewers are right to complain because they're paying for programming already and still seeing ads. But if you're watching good old broadcast with rabbit ears, then you likely rationalize that sitting through ads is the price you pay for free programming. We make the same calculations all the time. We fly coach because it's not worth another $1,000 to get a bigger seat and "free” drinks. We accept outdoor seating at our favorite restaurant on a humid day if it means being served immediately instead of waiting 30 minutes. Entertainment should operate by the same rules. If you hate ads so much that you're willing to pay top dollar to avoid them, then good for you. If you're willing to sit through some ads to save a few bucks, then you're not going to resent them as much. It works in gaming. The $10 billion mobile gaming industry is kept afloat by a very small group of users — 0.19 percent account for 50 percent of revenues, according to a recent report. The rest don't pay much but subsidize the games by agreeing to watch ads. On the other hand, the breakdown of ad-free to ad-supported viewers on Hulu is about 50/50. Clearly, there are many ways to make money on content while still offering viewers a choice. Ads will perform better. Though no one knows how ads might perform on Netflix if the company offered two-tiered ad-free/with-ad pricing, the success of opt-in ads is encouraging. Such ads, which are often used in gaming, provide rewards like tokens or access to new levels. An eMarketer survey showed that opt-in ads are a favorite of consumers. That's because such ads acknowledge that consumers' attention is a valuable commodity and offers them something in return. If Netflix takes this approach and runs relatively few ads, it will likely see a similarly strong response. Better targeting will make ads less interruptive. Unlike broadcast, Netflix does know something about its individual subscribers and can target them with ads for things they're likely to be interested in. Research has shown that ads based on behavioral targeting data are more effective. When you combine targeting with the fact that consumers have opted in to see such ads (to subsidize their subscriptions), that's a powerful combination.

The one flaw in this theory is that, at $9.99 a month, Netflix is still pretty cheap. That means the most compelling counter-offer would be free service. But while a free, ad-supported version would probably be a hit, it might also make many viewers think twice about paying that much each month. Ads might also erode Netflix's brand — it would go from a special service to just another cable channel. But if Netflix ever does decide in earnest to run ads, it won't be such a bad thing. In fact, it will help viewers reevaluate the value that advertising brings.