It’s become an industry guessing game: Will Netflix ever relent on its no-commercials stance and cash in on advertising?
There’s a persistent idea that Netflix is leaving money on the table by not selling advertising — which the company could definitely use toward its $18.9 billion in long-term content-spending obligations, not to mention paying off its $10.3 billion in debt.
The latest on this front: analysts at Nomura’s Instinet have calculated that Netflix could generate more than $1 billion in ad revenue per year if it launched a plan with advertising, with $700 million of that dropping to the bottom line. The Wall Street firm’s estimates are based on the assumption that Netflix introduces a free-to-consumer tier in 2020 that would scale to around 25% of its paid subscriber base by 2021, according to a research note Friday.
“An ad-supported tier could provide a lift to free cash flow, reducing the need for Netflix to raise debt frequently, especially beyond 2021 into a potentially rising rate environment,” Instinet equity analyst Mark Kelley wrote in the report.
As proof a mix of paid and ad-supported SVOD can work, look no further than Hulu. The streamer says around 70% of its viewers are on the $5.99 plan with commercials, and that it generated $1.4 billion in ad revenue in 2018.
However, the analysis of Netflix’s potential advertising windfall doesn’t fully account for the fact that any ad-supported service from Netflix would cannibalize its existing business. Presumably a substantial number of people would choose to cancel their paid Netflix memberships (or downgrade to a hypothetical cheaper, ad-supported subscription plan like Hulu’s entry-level tier). For Netflix, that would represent a loss of real revenue.
Plus, back-of-the-envelope math aiming to size Netflix’s theoretical advertising opportunity ignores a central component of why it’s become so enormously popular: People prefer to watch entertainment without commercial interruptions.
Being ad-free “is part of our brand proposition today,” Ted Sarandos, Netflix’s chief content officer, said last year at the MoffettNathanson Media & Communications Summit. One major reason consumers “kind of flee from traditional television is to get away from the advertising, particularly if you have kids… The no-advertising on our kids’ programming is a lot to parent.”
If Netflix rolled out a lower-priced plan with ads (at $3 less per month), only 25% of the company’s customers said they would definitely go for it, according to an August 2018 survey by Hub Entertainment Research. About 16% said they’d cancel their subscription while 34% said they were unsure (and one-fourth said they would “probably” keep it). A caveat on this study is that the hypothetical question was posed as a blanket switch by Netflix to an ad-supported model rather than the intro of an additional, optional tier.
Netflix’s no-ads philosophy is baked into its mission statement. Per its “Long-Term View” document for investors: “We don’t offer pay-per-view or free ad-supported content. Those are fine business models that other firms do well. We are about flat-fee unlimited viewing commercial-free.”
Earlier this week, Netflix threw a bit of shade on NBCUniversal’s plans for an ad-supported streaming service in 2020, after the Peacock announced it will pull “The Office” off Netflix to be exclusively available on its own platform starting in 2021. Netflix pointed out in a tweet that its customers can “binge watch the show to their hearts’ content ad-free” until January 2021.
Meanwhile, Netflix has been inking select marketing partnerships and product-placement deals over the last few years without having to adopt an ad-supported business model.
So, will there ever commercials on Netflix? Never say never, of course. But it’s worth noting that people have speculated for years that HBO, for one, would start selling ad inventory. It hasn’t.
Similarly, for Netflix, the likely downside of ad-supported video still outweighs any benefits the SVOD leader might reap.