Netflix Is Back In Game With New Ad Plans and Subscriber Growth
Netflix put an end to the subscriber losing streak in Q3 after gaining 2.4 M new subscribers. Reed Hastings Co-Founder and Co-CEO said, “Thank God, we’re done with shrinking quarters. That’s a big feeling of — we’re back to the positivity.”
Why it matters: The streaming giant had a rough patch in 2022 but rebounds in the third quarter with ad-supported tailwinds.
Quick Recap: Over the years, Netflix pitched for the ad-free model so the creators can focus on content than monetization. However, it reshaped its ad business with AVOD services to deal with losses and contribute to its growth. The company has witnessed gains after unveiling its Basic Ad plan in 12 countries, starting from Nov 3 in the U.S.
Details: In an investor call, the company said they are focused on new revenue streams, be it -the content side, advertising, or paid sharing and so they will no longer provide guidance on subscribers.
It is forecast to add 4.5 million subscribers next quarter, a bullish estimate considering it lost over 1 million subscribers in the first half of the year. The company touted newer hits, such as “Monster: The Jeffrey Dahmer Story,” and season 4 of “Stranger Things” that helped to move the needle last quarter.
By Numbers: CNBC reported the following financial numbers:
Revenue: $7.93 billion vs $7.837 billion, according to Refinitiv survey.
Expected global paid net subscribers: Addition of 2.41 million subscribers vs. addition of 1.09 million subscribers, according to StreetAccount estimates.
Will Ads add to the Growth?
The streamer said it was “very optimistic” about its new advertising business. COO Greg Peters anticipates sign-ups for Netflix Basic with Ads will add net new subscribers rather than existing subscribers switching off from current plans.
“We don’t expect a material contribution in Q4’22 as we’re launching our Basic with Ads plan intra-quarter and anticipate growing our membership in that plan gradually over time. Our aim is to give our prospective new members more choice – not switch members off their current plans. Members who don’t want to change will remain on their current plan, without ads, at the current price.”
Subscription growth is forecasted based on its upcoming content slate and the typical seasonality that occurs during the last three months of the year. With a lower price, a business will have a balance between monetizing with ads and providing access to all their great content.
Strong Competition
Netflix is in a highly competitive industry with viewers having a vast choice- from linear TV to streaming, YouTube to TikTok, and gaming to social media. Netflix noted its competitive advantage in a note to investors, saying:
“Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 to $6 billion annual operating profit.”
The streaming war is real. Streaming subscribers are not churning away because they are switching to other providers, not stopping streaming. The streaming industry is more competitive and ad-supported than ever before, but it still has the potential to evolve. Reeds explained that Netflix and Disney are two big brands in the premium space. And they are battling to provide the best content and low prices, basically all the competitive dynamics.
Ad inventory and targeting
Netflix is completely sold out on its ad inventory for the launch as the initial demand was very strong. This shows that advertisers are interested in the proposition of bringing their brands and their ads on Netflix. It is also building in a lot of capabilities over the next couple of quarters that will be important to advertisers to make that advertising offering increasingly attractive.
Netflix accelerated the release of its ads tier, which is why it has limited targeting options. Right now. they will have basic targeting capabilities with Basic Ad plans. Gregory K. Peters COO & Chief Product Officer said, “we do have relatively basic targeting capabilities in terms of contextual targeting, genre, et cetera.”
He further added, “Now our job is to move from that into more of what we expect from a digital world, where we have 100% signed-in audience, fully addressable, fully targetable, and so we can start to layer in additional targeting capabilities over time.”
Privacy is also a priority for Netflix. And that is where Microsoft fits the bill. Despite having deeper roots in connected TV advertising than Microsoft, the industry was surprised by Netflix’s ad sales partnership with Microsoft. Peters said, “We’re very cognizant of privacy. And all of the data that we use will just be used to basically deliver more relevant ads offering on Netflix, and we’re not using that data in any way, shape or form for a profile building off Netflix.”
Peter believes Microsoft has the go-to-market capability of Netflix. With the joint capacity growth, they will be able to serve the advertisers better. Netflix recently announced measurement partnerships – DoubleVerify and Integral Ad Science to handle ad verification, viewability and brand safety, and with Nielsen for the audience measurement.
Big change in account sharing
Netflix has finally cracked down on password sharing which has eaten into its bottom line. The streamer will monetize account sharing and will roll out in early 2023. The ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (“extra member”), if they want to pay for family or friends. In countries with a lower-priced ad-supported plan, the streamer expects the profile transfer option for borrowers to be especially popular.
Peter said they have been working to find a balanced approach that supports customer choice and customer-centricity. But also will make sure that “as a business, we’re sort of getting paid when we’re delivering entertainment value to consumers.”
Interesting Read: Have You Played Netflix Games?
Have You Played Netflix Games?
Netflix is becoming more aggressive in its push into gaming, but less than half of the streaming giant’s subscribers are playing at the moment. In fact, it plans to double its video game catalog by year’s end. Games have been rolled out since November to keep users engaged between show episodes. The games are accessible to subscribers on the Netflix app.
Isn’t Netflix streaming service, why games?
In a streaming market dominated by Netflix, Amazon Prime Video, Hulu, and Disney Plus are its most obvious competitors. However, Netflix has other plans. Rather than competing for the title of leading streaming service, it vies for users’ attention.
Gaming is therefore an appropriate addition to its entertainment offerings. In between movies and shows, subscribers can play games on Apple iOS and Android devices. Netflix’s subscriber base has also been declining, and it’s not surprising that Netflix is interested in exploring a different demographic.
Over the past year, Netflix has acquired three mobile game studios in order to broaden its entertainment offerings. Recently it acquired Finnish developer Next Games for a total value of $72 million. As per stats obtained by CNBC, Apptopia estimates that Netflix games have been downloaded 23.3 million times, with an average daily user of 1.7 million people.
That may sound impressive on paper, but it represents less than 1% of Netflix’s 221 million subscribers. This data appears to indicate that approximately 200 million people who have access to Netflix’s game library are currently not playing them or are unaware of its existence.
The reason? A big problem with Netflix is that not many of its subscribers care, and it does not spend much on PR campaigns. Despite owning all three game studios, the company spends more on one big-budget movie than it does on all three. However, Netflix is now bringing AVOD to the forefront, hopefully selling more subscriptions while compensating for any revenue losses (and increasing revenue).
The importance of games to Netflix’s overall strategy has arguably grown in recent months, as the company competes for user attention more aggressively. Netflix lost nearly a million subscribers in the Q2, after losing 200,000 in the first — its first major subscriber decline in more than a decade.
Interesting Read: AVOD Surprise: Netflix Advertising Powered By Microsoft
TikTok, a strong competition
Video games are a multi-year endeavor that requires a dedicated and talented team. Even though Netflix produces good games like Stranger Things, Exploding Kittens, or Moonlighter, it takes more than a few titles to entice the gamers away from their Xbox, Playstation, or Apple Arcade and play them. Netflix understands that apps like TikTok are its main competitors for mobile attention.
Netflix named Epic Games and TikTok as two of its main competitors for people’s attention. The company claimed they are in the early stages of expansion into games and view it as another new content category. A key benefit of the strategy for Netflix is that it can drive engagement beyond the show’s initial release and revenue.
A lot of ambiguity
Netflix has been tight-lipped about how it intends to make video gaming a core component of its strategy. According to CNBC, Netflix appears to have taken a risk, as COO Greg Peters stated last year that the company was “many months and really, frankly years” into learning about the gaming industry. In the Q4 earnings call, he also said,
“We’re going to be experimental and try a bunch of things. But I would say the eyes that we have on the long-term prize really center more around our ability to create properties that are connected to the universes, the characters, the stories that we’re building.”
Leanne Loombe, Netflix’s head of external games, said during a panel at the Tribeca Film Festival in June.
“We’re still intentionally keeping things a little bit quiet because we’re still learning and experimenting and trying to figure out what things are going to actually resonate with our members, what games people want to play.”
The streaming service hinted earlier this year that it would license popular intellectual property for its new gaming offerings. However, there are no details on investment in this capital-intensive segment.
As projected by Apptopia, Netflix games have less than a quarter of the downloads of the top mobile games. Examples include Subway Surfers, Roblox, to name a few and each has over 100 million downloads. As quoted by CNBC, Netflix co-CEO and co-founder Reed Hastings said earlier,
“We’ve got to please our members by having the absolute best in the category.“We have to be differentially great at it. There’s no point of just being in it.”
Despite that, Netflix plans to double the number of games in its library from 24 to 50 which will also include Queen’s Gambit Chest based on the show by the end of this year. Netflix’s games aren’t attracting anyone despite a solid list and a small percentage of subscribers playing them. On the other hand, there are hundreds of lousy mobile games that have twice as many downloads.
Evidently, gaming is still in the infant stage for Netflix. Considering the company is looking to reduce expenses, is it worthwhile to invest more money in this gaming experiment?
Interesting Read: The Journey From Deterministic To Probabilistic Marketing
AVOD Surprise: Netflix Advertising Powered By Microsoft
Netflix is building its advertising business and the streaming giant has signed Microsoft as its first ad tech partner. In April, Netflix surprised the world with the news that it plans to launch an ad-supported tier. Industry watchers were expecting that Netflix was close to picking an advertising platform to help it build the ad-supported tier of service.
Why Microsoft of all the choices?
Microsoft Advertising is the dark horse contender for the Netflix account and a positive surprise for the industry. Notably, other potential adtech partners such as FreeWheel or Google have interests competitive to Netflix’s. They both sit inside companies that have their own content plays on streaming TV. This likely knocked them out of the race.
Prior to its acquisition of Xandr, Microsoft was not even considered a serious programmatic competitor in the industry. As an early, dominant player in programmatic display advertising, Xandr (formerly AppNexus) started focusing on the TV/video ad space after being acquired by AT&T in 2018.
Xandr is well suited to build Netflix’s ad operation from scratch, a task that won’t be easy but isn’t new for the company. The ability to provide privacy, combined with an established ad tech stack and a strong ability to iterate quickly, helped Xandr push over the finish line. Greg Peters COO and CPO said,
“Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering. More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members. “
Interesting Read: Marriott International : A Hotel or An Ad Tech Company?
What does this mean for advertisers?
Marketers looking to Microsoft for their advertising needs will have access to the Netflix audience and premium connected TV inventory. The Microsoft platform will be the exclusive provider of all Netflix ads.
In the future, a Netflix subscription with ads at a lower price may entice value-seeking customers. With Netflix entering the ad-supported streaming world (AVOD), advertisers will have access to a wide range of premium inventory.
As AVOD continues to expand, this partnership not only supports the momentum but also creates more competition in the field. The recent Disney partnership with the Trade Desk also gives advertisers access to more premium AVOD inventory.
Interesting Read: Connected TV Explained: The Essential Glossary Of CTV
Why do we care?
With Netflix getting into the AVOD market, the equation changes entirely for TV watchers who compare steep cable subscription fees with rising streaming costs.
CTV advertising is known for its chaos, consumer dissatisfaction, and controversy. Netflix has never faced any of these issues. The biggest challenge will be to maintain the balance between efficient monetization and retaining subscribers who are used to ad-free content.
The question of the hour: Does this partnership really push the envelope on ad innovation?
Certainly, Microsoft brings gaming to the table, where there are opportunities and innovation, but there is still much room for development. If It could be magic if these new partners are able to translate this kind of next-gen thinking into the more traditional streaming TV ad ecosystem.
Interesting Read: Is Microsoft Reinventing Its Ad Business With Massive Acquisitions?
