TBI Tech & Analysis: Netflix’s ad-tier launch shows a failure to commit

The Night Agent

Much has been made of Netflix’s recent push into ad-supported subscription models, but Omdia’s Tony Gunnarsson argues that the streamer has not fully committed to the move – and explains why.

Netflix launched its new ad-supported subscription tier, “Basic with Ads,” in November 2022 in 12 markets, including the US and key international countries.

Based on the launch, however, The Night Agent and Wednesday streamer appears to be testing the waters, seemingly uncertain about whether it will fully commit to a more advertising-centric future.

According to reports, Netflix’s worldwide advertising team is staffed by only seven employees—everything is outsourced to advertising partner Microsoft. Netflix’s approach to advertising stands in stark contrast to Disney’s, which has an evolved advertising strategy with continuous, long-term investment into in-house ad tech solutions and an established advertising sales force.

Omdia had previously assumed Netflix would be fully committed to advertising, but it appears thus far Netflix is being extremely careful. Netflix Basic with Ads is a very basic tier, allowing only one screen, no profiles, 720p resolution, and a content offering that is not comparable with premium tiers. As such, the new ad tier will likely function as a downgrade for households struggling during the cost-of- living crisis and as an entry-level starter plan for new subscribers. But if you want the full Netflix experience, Basic with Ads is not it. In other words, Netflix looks to be merely dabbling with ads.

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In Omdia’s latest forecast, come 2027, Netflix will have up to 42m ad-tier subscriptions, reflecting just 14% of its total global subscriptions. This is a much more conservative outlook than anticipated in Omdia’s preliminary suggestion ahead of the launch—when we expected, indeed encouraged—a more emphatic move toward advertising. In 2023, Netflix is expected to end the year with 244.4m subscriptions globally, with a total revenue figure of $32.5bn, of which only $143.9m will be advertising (0.4% of total global revenue). By 2027, Netflix’s advertising revenue is expected to reach $1.2bn (3.1% of Netflix’s global revenue).

As for ad-tier uptake, Omdia expects 8.5m subscriptions on ad-supported tiers by the end of 2023 (3.5% of Netflix’s total subscriptions globally). The domestic US market will be key for Netflix Basic with Ads, where hybrid ad-supported services are already a familiar proposition to customers. Internationally, Netflix Basic with Ads will likely become an accepted—if slightly niche—tier.

Netflix built its incredible success on the SVOD model, so it is understandable why some voices within the company are hesitant about diving headlong into advertising. Mixed messages from Netflix suggest there are internal power struggles, with clashes between teams with conflicting priorities regarding what to do about the ad business and how quickly. Hence, Omdia’s new analysis is much more conservative than our earlier, preliminary, aggressive scenario.

This report is taken from the Analyst Opinion piece With 12 Markets Already Live, Omdia Publishes The First Formal Forecast For Netflix Basic With Ads, by Tony Gunnarsson, Omdia’s principal analyst, TV, Video & Advertising, available here.