Why Netflix Needs To Consider Advertising

Photo of Tim Mulligan
by Tim Mulligan

Last Friday’s (August 17th) revelation, that global subscription video on demand (SVOD) market leader Netflix was running trailers on the service for its original content shows, has created a Voldemort (that which cannot be said) moment for the company. Netflix denied that these trailers were in anyway a precursor for introducing an ad-supported tier of service into the platform, and were instead among the hundreds of feature trials that Netflix routinely runs to help tweak the promotion of new content to its members.

Netflix has stated that it has no intention of substituting the skippable trailers (UK Netflix users have claimed that these were unskippable) between shows for ads on behalf of third parties. Officially, this episode was about Netflix improving content discovery for its users rather than building a respondent data set around a trialled ad-like user experience for a subset of its members.

Why advertising is such a vexing issue for Netflix

In its vaunted position as the ‘operating system for joy’—defined by tech commentator Scott Galloway, Netflix distinguishes itself from traditional TV competitors in its domestic market with three key features: firstly, it enables access to TV content via a contract-free monthly membership; secondly, it offers on-demand content access; and thirdly, it is ad free. Hubristically, traditional pay-TV operators placed a tax both on access via minimum term-fixed contracts, and a tax on attention in the form of commercial ad breaks in the network programming available on their services. Netflix’s current USP is that it only taxes its members once for access to content.

Despite ad industry claims to the contrary, ads are not welcomed by consumers because they intrusively interrupt programming and create abstract limits around video content length. Ads have been historically tolerated by users on broadcast TV because they are not paying an additional subscription fee. As soon as subscription TV audiences had the opportunity for ad-free viewing, then they started to vote with their wallets and shifted en masse to SVOD alternatives, of which the primary beneficiary to date has been Netflix.

The subscription price point impediment to global adoption

Fortunately, Netflix’s existing price points in the US market allows it competitively undercut its competitors and so lure away traditional pay-TV subscribers. Internationally, however, the situation is profoundly different. Netflix’s localised standard membership cost rises from 0.2% of monthly GDP per capita in the US, to 4.9% of monthly GDP per capita in India. Netflix’s $8 monthly standard membership fee in India makes it 22 times more expensive for the mainstream Indian consumer than for the mainstream US consumer. And this is after reducing the standard cost by 27%.

With its current pricing model, Netflix can only grow beyond being a service that caters to elites in emerging markets in the mid-term future, if it is prepared to introduce advertising into its international revenue mix. This is why last week’s data test was so important and can be expected to be replicated in other more price-sensitive markets.

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