Why Netflix Adoption of Video Advertising Would Be a Total Disaster

Netflix is spurning a $70 billion TV and video advertising opportunity — and there’s no doubt that it’s the right thing to do.

Last week, CEO Reed Hastings unequivocally shot down the notion that the service would include any ads, now or in the future. His comments came after reports suggesting Netflix was launching preroll ads; in fact, the company was merely promoting its own shows to users.

“No advertising coming onto Netflix. Period,” Hastings wrote in a Facebook post. “Just adding relevant cool trailers for other Netflix content you are likely to love.”

Of course, companies and execs routinely deny that they’re pursuing a specific strategy — and then, perhaps, a few months later do exactly what they said they wouldn’t do.

But Netflix has consistently — and wisely — insisted it has no interest in building out an advertising play. The idea is baked into the company’s long-term view mission statement: “We don’t offer pay-per-view or ad-supported content. Those are fine business models that other firms do well. We are about flat-fee unlimited viewing commercial-free.”

If Netflix were to introduce ads, it would arguably be an even bigger debacle than the company’s botched move to split apart DVD and streaming-video subscription plans in 2011, which effectively amounted to a 60% price hike for most customers.

Sure, Netflix would stand to reap hundreds of millions of dollars in ads, if it chose to go that route. But it would suffer seriously diminishing returns — given that people hate ads in digital video even more than they hate commercials on TV.

Just look at Hulu. The presence of ads in its premium SVOD service is one of the key obstacles preventing it from scaling up to really compete with Netflix. While the company has been contemplating an ad-free offering for several years, its owners — Disney, NBCUniversal and 21st Century Fox — have grown accustomed to selling ad inventory on the site. The networks control about 90% of the ad inventory on Hulu for their respective shows, and they’re not likely to cede that revenue stream.

Netflix, by comparison, has never carried ads. And the company’s execs, it seems, are smart enough to know that inserting commercials into the mix would be an epic fail.

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