Back in the first quarter of the year, Netflix’s new ad chief, Amy Reinhard, was wrapping up her European ad industry meet and greet in London.
While there, she met with executives from GroupM to hear how they prefer to work with Netflix and, more crucially, their expectations. It was during this chat that she got a key piece of intel: GroupM’s London office serves as the gateway to its global operations. Any worldwide deal with GroupM would start right there, in the room where she was tuning into the way things got done, according to someone familiar with the meeting.
At first glance, this might seem like just a casual observation. But on closer look, it highlights Netflix’s current position in the advertising world: a year and a half into its ad venture, Netflix has made some progress but is still figuring out the finer points of how the game is played.
And don’t let the shiny numbers from the streamer’s second-ever upfront dance blind you to this reality. The 150% surge in ad dollars during negotiations this year, compared to last year sounds impressive, but it’s not enough to mask the deeper, underlying challenges Netflix still faces, from competition to limited scale. There’s a lot of work ahead.
But Netflix’s ad strategists aren’t likely to be shocked by this. They’ve always been playing the long game. That’s why they’ve set high ad prices, maintained limited ad loads, and made the ad tier opt-in rather than opt-out. They’ve been clear from the start that it would take time for the ads business to reach critical mass.
What probably wasn’t clear to those execs was how competitive the ads business would be — especially after Amazon threw a wrench into the streaming ad market in February by converting its entire Prime Video subscriber base to an ad-supported version. Suddenly, the high prices Netflix was asking for a relatively tiny audience looked even steeper.
“I had a debate with my procurement director over why we’re not advertising on Netflix and their argument was that ‘it costs too much for limited reach’,” said a media specialist at a CPG advertiser, who exchanged anonymity for candor.
Candor like this is pretty much old news to Netflix ad execs at this point. They’ve been hearing variations of these concerns since the ad tier launched in the fall of 2022. And since then, they’ve been working to address them whenever possible.
Take ad pricing, for example. Netflix has slashed its ad prices from $60 CPM in 2022 to around $29 now. Advertisers have taken note and adjusted their budgets accordingly, as reflected in the numbers Netflix shared during its upfront deals. But even with these adjustments, Netflix’s ad costs still lag behind Amazon’s, which offers ads at a CPM in the low $30s with a significantly larger audience—200 million subscribers according to Amazon, compared to the 40 million Netflix reports for its ad-supported tier..
“For those who were already feeling priced out, not much has changed at this point.” said Andrew Sandoval, vp of biddable media at Croud. “As the technology has matured and the user base increased, the perception has changed slightly. However, if you’re strapped for budget, it’s still a very premium buy that is hard to justify compared to other more efficient and fully featured CTV offerings.”
Ad buyers like Sandoval have echoed these concerns all year. They see Netflix addressing its scale issues and evolving its tech, but that’s not enough to persuade them to shell out big sums right now.
“They’re in their crawl phase of their crawl, walk, run,” said Natasha Tibbett, vp, media, Swell Media.
The last quarter perfectly encapsulates this struggle.
In countries with the ad-supported tier (including the U.S., the U.K. and Australia), it now represents 45% of all sign-ups, up from 40% in April. This growth was driven by a 34% sequential increase in members subscribing to the ad-supported tier over the second quarter, which grew 65% in the first quarter and 70% in each of the prior two.
Impressive as those gains are for a business spun up less than two years ago, the growth isn’t as substantial as it could have been.
Internally, the clash between ad and product teams is throwing a wrench in strategy execution, according to two marketers who confirmed a report on those tensions from The Information. Netflix has denied these claims.
Externally, the streamer is juggling the tightrope of ad load versus viewer satisfaction while continuing to cater to a global audience.
Add to that a cooling digital ad market and the fierce, cheaper competition and it’s a mountain to climb for Netflix’s ad execs.
What makes it even trickier is that these execs are stuck bridging the gap between Netflix’s original ad vision and its evolved version. The departures of Jeremi Gorman and Pete Naylor over the past year underscore just how wide that gap is. Somewhere between their arrival and exit, Netflix’s plan took a turn— shifting from how ads are sold, to how they’re bought.
It’s a subtle shift but one that’s driving Netflix’s increasing obsession with ad tech.
And like all obsessions, this one has led Netflix to make some bold — and possibly questionable — moves. The most glaring example? Ditching the Microsoft ad server that helped kickstart its programmatic business two years ago in favor of launching its own platform worldwide by the end of next year. For companies with established programmatic businesses, this is a tough sell, let alone for a newcomer like Netflix.
The only reason Netflix might be making this risky move is that if it can’t offer marketers a huge audience, it can promise serious impact.
For example, a hit film like the latest Beverly Hills Cop which is on Netflix, that Nielsen reported as the most-watched show in the U.S. last month, could be more appealing to big-spending advertisers than paying for ads where it’s harder to determine the total reach. In other words, Netflix’s programming is a bigger draw than the audience it has limited data on, advertisers say.
That’s where programmatic could help.
If enough marketers buy into the idea of impact, not necessarily reach, for advertising on Netflix, then the streamier could cash in quickly with programmatic ads. After all, it has worked for YouTube. Who’s to say Netflix can’t roll back the same playbook. Senior execs there haven’t exactly been shy about trumpeting what they see as parallels between the two streaming platforms.
“Looking at the Nielsen data that just released for June, what you see there is Netflix and YouTube are the clear leaders in direct-to-consumer entertainment,” said Netflix co-CEO Ted Sarandos. “So us and YouTube represent about 50% of all streaming to the TV in the U.S. And we use the U.S. only because that’s where we have the data. So really, what we’re focused on here is focusing ourselves on that other 80% of total TV time that isn’t going to either us or YouTube.”
And few things can grab that untapped attention like live sports. Netflix knows this, which is why it splurged under $150 million dollars (per game) on broadcasting two NFL games on Christmas Day this year.
But here’s the tricky part: turning those broadcasts into profit. Netflix needs the tech to dynamically insert targeted ads during these events and must also navigate the complex negotiations that come with securing such deals — a challenge made even steeper by the timing of those games. That reported $5 million price tag Netflix is asking advertisers to pony up for these games? That’s going to be a hard sell.
