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Opinion: Netflix Faces Problem of Scale With Ad Funded Model

Since it was launched in October 2022, Netflix’s advertising funded model has failed to meaningfully scale-up while the cost to advertisers is an expensive add-on to any media plan, writes Stephanie Barry.

In December 2022, my colleague Dave Mulligan provided an update on Netflix’s forthcoming advertising offering in the UK market, which has not yet been introduced here in Ireland.

Since then, Netflix’s offering has evolved slowly and as of now the level of adoption remains relatively modest.

Early Days

Of course, it is still early days for the ‘Netflix Basic with Ads’ tier, with an estimated 3% of users in the USA already choosing this option. If we apply this uptake rate to Netflix’s 232m subscribers worldwide, it suggests that 7m households could be reached globally through paid advertising on the platform.

Core’s Q1 Media report estimated 73% of people have access to Netflix, based on Core Research’s November 2022 survey which suggested 58% of people are already paying for a subscription.

Again, applying the 3% figure from the USA, it suggests that when Netflix Basic is introduced in Ireland, only around 70,000 people will be on this tier.

TV Still Dominates

In the UK, Netflix accounts for 9% of overall video consumption. Broadcast TV still dominates, accounting for 64% of total video viewing in April 2023. Subscription Video on Demand (SVOD) represents 15%, and this figure is spread across multiple platforms including Disney+ and Amazon Prime (Source: BARB).

Similar to the US, if only 3% of UK Netflix users decide to opt for the ad-supported subscription tier, it would mean ‘Netflix Basic with Ads’ tier wouldn’t even be a Top 20 TV station in this market.

Problem of Scale

As my colleague Dave mentioned in the previous update, Netflix launched its ad supported model last November in the UK. Campaign delivery has improved over the past number of months as the subscriber base has increased, but scale is still a problem, with maximum budgets per campaign averaging between £15,000 to £20,000.

To put some context around this, nearly £4bn was spent on TV advertising in the UK last year. Targeting, including age and gender, genre, time of day, movie trailer, top 10 chart, or sponsorship is available on the platform, but it comes at a steep premium. In some instances, cost can be ten times what an advertiser pays on linear TV.

Netflix’s main way of boosting the volume of subscribers at the moment is to target password sharers. The enforcement of Netflix’s single household policy has begun to make waves in Ireland in the past few weeks. Those who had been piggybacking off other users’ accounts are now finding themselves locked out of the platform. This change will force users to either leave Netflix or sign up for their own account.

Netflix subscribers in Spain, Portugal, Canada and New Zealand can add up to two people they don’t live with to their account for less than €5.

Overall, it is still early days for Netflix’s ad-funded model. Its main challenge is the lack of scale. Having Netflix on a media plan, alongside the likes of TV, broadcaster VOD or YouTube, is currently an expensive option for advertisers.

However, one of the main benefits is being able to target the harder-to-reach younger demographic of 15-34 years olds.

In Q1 this year across linear TV in Ireland, this audience declined by nearly 18% year-on-year. At the same time, broadcaster VOD did increase by 24% though, reminding advertisers that video is still one of the most powerful media channels out there.

At Core, we’re frequently asked about the potential impact of subscriber based (SVOD) players launching ad funded models locally. In the short-term once launched we don’t feel they will have as significant an impact as one might expect, but in the medium to long-term it’s certainly something we will be tracking and updating the market on.

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