Analysing the tepid response to Netflix’s AVOD version

Is Netflix’s ad-supported offering a dud? While it is too early to come to that conclusion, the much-touted ad tier, launched in 12 countries in November, isn’t eliciting encouraging response from the audience, at least in the US. The basic ad plan has garnered only 9% of new subscribers in the US in November, according to subscription analytics firm Antenna. 

Netflix has rebuffed Antenna’s data with its spokesperson telling The Wall Street Journal that it is still “very early days for our ad-supported tier and we’re pleased with its launch and engagement, as well as the eagerness of advertisers to partner with Netflix”.

The advertisers, however, aren’t as eager as the streamer claims. Netflix has reportedly returned money to advertisers after it fell “short of ad-supported viewership guarantees made to advertisers,” according to Digiday. The report, quoting five agency executives, says that Netflix has “only delivered roughly 80% of the expected audience”.

“They can’t deliver. They don’t have enough inventory to deliver. So they’re literally giving the money back,” said one of the agency executives, who blamed the streamer for the lack of a big marketing push to promote the ad-supported tier and attract subscribers.

Yes, Netflix was in a hurry to launch the ad-supported version, as it faced the toughest of times since its launch. The first six months of 2022 saw the streaming giant laying off 450 employees on two different occasions. The streaming company’s share price fell almost 20% after it lost, during the first quarter, 200,000 subscribers worldwide, especially in markets like the US, fuelled to a great extent by increasing competition from rivals like Amazon Prime Video, Disney+, HBO Max, Peacock, Paramount+, etc. (The target for the year was 2.5 million new subscribers.) The tough conditions prompted the streamer to resort to measures like imposing a ban on account-sharing, and launching an ad-supported tier, which the company has shunned for long.

For the ad-supported tier, Netflix tied up with Microsoft to sell its ad slots, and signed with BARB (the Broadcasters’ Audience Research Board) and Integral Ad Science and DoubleVerify for the purpose of measurement.

According to reports, the streamer was selling its slot at a price of around £50 for every 1,000 viewers reached; that is double the rate charged by streaming services owned by Channel 4 or ITV. Some of the brands that joined were L’Oréal and the world’s biggest brewer Anheuser-Busch InBev, which owns popular names like Budweiser. But there is neither independently assessed audience data nor the option to target specific demographics. Well, analysts feel that, going forward, brands will demand sophisticated and advanced targeting capabilities from Netflix. 

And there are no popular titles such as ‘Peaky Blinders’ on the ad-supported platform. Licensing restriction was the reason cited by Netflix COO Greg Peters for this. He said that only 5% to 10% of Netflix’s total catalogue would not be currently available in the ad-supported tier.

Too early?

Meanwhile, industry observers say that it is too early to arrive at a conclusion that Netflix ad tier is a failure.

Netflix is always known for its subscriber-based plans and providing the best of the experience to its viewers, says Faqhrul Husaini, Producer and Co-founder, Smiley Films. “Now this is the early stage of their AVOD roll-out; yes, it has not got the desired results, but we will have to wait for another 2-3 years before making up our minds about it. It will be more clear when they will expand AVOD-based plans in more markets. I think as SVOD has failed to get any streaming giant in a profitable position and economical situation is getting worse, so AVOD is going to be the main revenue generation system for all the streamers, but SVOD will be there for premium customers who prefer experience over money,” he adds.

It’s still early days for the ad tier and we’ve yet to hear from Netflix, says analyst Paolo Pescatore. Therefore, he adds, we can expect some guidance during the next quarterly earnings call.

“Let’s not forget the calendar fourth quarter tends to be a good one in terms of subscriber growth due to seasonality. This has been a good quarter of programming with ‘The Crown’, and of course, the Harry & Meghan documentary. Netflix will hope that the huge anticipation for the show will lead to sign-ups. The streamer is not dead. The show will reinforce its market-leading position as an indispensable streamer in people’s homes,” he says.

According to him, the show is a blockbuster in its own right that will draw attention among users who have not already subscribed to the streamer. “Unquestionably, this ensures that Netflix ends the year in a far stronger position, building on blockbuster third quarter, with normal service having been restored. This is in stark contrast to the first half of the year. Significantly, this excludes the move into advertising, which will help broaden its base, business model and much more.”

Rosy future for AVOD

Analysts feel ad-based tiers, or the hybrid model, will catch up in the days ahead. According to a forecast by Bloomberg Intelligence report, Netflix’s ad-based subscription plan has the potential to boost revenue and user growth. 

“Longer term ads are expected to reboot user growth and while cannibalisation is the single biggest worry, robust ad average revenue per user should help to reaccelerate sales,” say Bloomberg Intelligence senior media analyst Geetha Ranganathan and senior associate analyst Kevin Near.

Going forward, we can expect a hybrid model to take precedence, according to a research report by Digital TV Research.

The report says that only 24% of Netflix’s total subscribers (which is 63 million) will pay for a hybrid AVOD-SVOD tier by 2028.

Simon Murray, Principal Analyst at Digital TV Research, feels that the majority of Netflix’s SVOD-only subscribers will remain on these plans, despite the cheap availability of AVOD-SVOD tier. “The hybrid tier will appeal most to developing countries where disposable incomes are lower. The hybrid tier will also be attractive to new subscribers that do not have legacy SVOD-only subscriptions,” he says.

Globally, ad-supported tiers will drive SVOD subscriptions to increase by $428 million between 2022 and 2028 to reach $1.76 billion, according to the Digital TV Research. A hybrid SVOD-AVOD model, led by giants like Netflix, Disney+, Warner Bros. Discovery, etc. will drive growth.

According to Murray, Netflix will provide its hybrid AVOD-SVOD tier in 85 countries by 2028, followed by Disney+ in 91 countries, and HBO in 55 and Paramount+ in 56. The research firm estimates that these four platforms will have a combined 372 million hybrid AVOD-SVOD subscribers in the next five years.

Given that Disney+ subscribers in most markets are expected to convert automatically to the hybrid AVOD-SVOD tier, Digital TV Research predicts that the platform will have 206 million subs to this tier by 2028 – or 88% of its total.