Netflix will also roll out a solution for its password-sharing problem next year.
Netflix plans to bring commercials to its platform for the first time in “early 2023,” according to the company’s Tuesday letter to shareholders.
The streamer gave the firmest timeline yet for its plans to bring advertisements to its streaming service when it reported its Q2 earnings Tuesday. Previous reports had pegged the launch of Netflix’s ad-supported tier to late 2022. “Our lower priced advertising-supported offering will complement our existing plans, which will remain ad-free,” the letter reads.
There is no word on AVOD Netflix pricing. Currently, the cheapest Netflix-subscription plan (in the U.S.) costs $9.99 a month.
Netflix says it plans to “start in a handful of markets where advertising spend is significant.”
“Our intention is to roll it out, listen and learn, and iterate quickly to improve the offering,” the letter reads. “Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners. While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues).”
In addition to ads, a crackdown on password sharing is one of three key areas of near-term focus Netflix outlined in Tuesday’s letter. Earlier this year it launched trial runs of two approaches to tamping out the issue in Latin America. The company is “encouraged by our early learnings” and its ability to earn revenue from Netflix leeches, according to the letter.
One of those approaches prompts users who share their account to “add a home.” Subscribers get either one, two, or three free additional homes, depending on their plan. If users want to share with more households than their plan allows, they have to pay an additional fee. In Argentina, for example, extra homes cost about $3 (USD) a month — the same amount it would cost to get a basic subscription of your own.
“We’re in the early stages of working to monetize the 100m+ households that are currently enjoying, but not directly paying for, Netflix,” the letter reads. “Our goal is to find an easy-to use paid sharing offering that we believe works for our members and our business that we can roll out in 2023.”
After a long stance against ever introducing ads on his platform, Netflix co-CEO Reed Hastings dropped two major bombshells with the company’s Q1 earnings report: Netflix lost subscribers for the first time in a decade (200,000) and he was considering an ad-supported tier some time over the next year. That timeline seemingly accelerated, as the company soon went full speed ahead with plans to add commercials by the end of the year. The company warned it was expecting more subscriber losses this quarter, on Tuesday Netflix reported it lost 970,000 members.
Netflix last week announced it chose Microsoft to power its ad tech and sales. That means that companies that want to advertise on Netflix can do so exclusively through Microsoft’s platform. “They are investing heavily to expand their multi-billion advertising business into premium television video, and we are thrilled to be working with such a strong global partner. We’re excited by the opportunity given the combination of our very engaged audience and high quality content, which we think will attract premium CPMs from brand advertisers,” Tuesday’s letter reads.
Many ad partners capable of executing at Netflix’s massive scale also compete with the streamer. Netflix reportedly considered partnering with Google, which has both a robust ad business and owns YouTube, or Comcast, owner of NBCUniversal and Peacock. Microsoft has no significant content business.
Netflix’s need to seek an outside partner for commercials puts it at a disadvantage compared to Disney, which also plans to launch ads on Disney+ for the first time later this year. Disney, with its portfolio of TV channels and streamers that already show ads, has in-house capabilities that Netflix doesn’t. Ditto for other competitors like HBO Max. It all adds up to the fact that Netflix will likely be able to make less money selling ads unless it eventually builds up its own sales and tech infrastructure.
Still, Netflix has a years-long head start in the key area of subscribers. Even with the membership slide it announced today, its 220.67 million subscribers make Netflix the most popular service worldwide. Disney perhaps comes closest, but its 205.6 million subscribers are spread across Disney+, Hulu, and ESPN+.