Netflix has dominated the subscription streaming market but is entirely new to AVOD. On July 19th, the platform confirmed it plans to go live with a new advertising-supported tier in early 2023 (Indiewire). (Although, controversially, possible missing some existing content). A successful launch will require crucial decisions around advertising load and placement, advertising sales strategy, and the acceptable level of sophistication for any advertising technology. We’ve compared the models of some of the strongest players in the FAST and AVOD market to dissect what good looks like and consider how Netflix could make it work. 

1. Commercial placement and advertising load

Top of mind for Netflix when introducing their new AVOD tier will be deciding on the advertising load. Advertising volume is a tricky line to tread, and Netflix - who previously swore never to support adverts on the platform - will be acutely aware of the risks of getting it wrong. Since the advertising-supported tier will still require a subscription, albeit one with a lower cost, they will need to decide on a volume that consumers feel is good value and offers minimal disruption to the viewing experience. 

The other significant choice is around commercial placement. Here, Netflix could face unique constraints due to its content licenses. Distributors require different content licenses to break up content with adverts: as of yesterday, it looks like Netflix has hit this snag, with the announcement some content might not be available on the advert-supported tier (Netflix Q2 2022 Earnings Interview). 

Analysts believe Netflix will take the easy option and front-load all programming to “leave the rest of the TV series or movie undisturbed” (Indiewire). This solution would be the least disruptive and give Netflix a competitive edge over FAST and AVOD offerings that contain advertisements at the beginning, middle, and end of videos. However, Netflix will need to consider how this decision might impact advertising revenue and avoid front-loading too many adverts or risk viewers tuning out. It’s also worth noting that this decision might change as their advert-supported offering develops sophistication, especially with the attempts to franchise original content like Stranger Things

Standards vary, but viewers generally expect FAST and AVOD offerings to have a lower advertising load than linear TV. Tubi TV, for example, only plays around four to six minutes of advertising for every hour of content, although it shows commercials both when the content starts and within the videos themselves (source). Netflix’s premium content is a strong point in their favor, but viewers might still feel short-changed if they receive a similar volume of advertisements compared with free services. 

Statista (2022), Number of Netflix Paid Subscribers Worldwide. On July 19th 2022 Netflix announced a loss of almost 1 Million subscribers across Q2 2022.

2. Advertising sales strategy 

Once Netflix has decided on the format of its advertising tier, it’ll need an advertising sales strategy. This plan will determine advertising revenue and will depend highly on the sophistication of Netflix’s advertising sales partners. 

Existing advert-supported platforms have a huge head start here. Tubi TV, for example, works with Yahoo’s demand-side platform to sell advertising space but also has its own internal advertising sales team (source). For Netflix, it’s more complicated. They don’t have an existing advertising sales department or strategy, so they’ll almost certainly outsource this component at the beginning. Again, this process is made complicated by Netflix’s existence to date as an anti-advertising platform. Ed Lee of the New York Times predicts Hollywood might “balk” at the idea of adverts introducing their creations, and notes how negotiations with content producers might further cull profits if they “want a cut of ad revenue or just more money up front”. Given the premium content Netflix brings to the table, it’d make sense for them to invest in a specialist in-house advertising sales team to manage the process once they’re up and running. 

3. Data depth and advertising technology

The final, crucial element Netflix will need to consider for its model is the strength of its advertising data. To begin with, Netflix is unlikely to have issues sourcing advertisers due to its premium, popular content like Squid Game and Bridgerton. However, demand might not last unless the platform is willing to provide the metrics and granularity advertisers now expect. 

Existing advert-supported platforms offer impressive sophistication around audience breakdowns, CPM metrics, and engagement analytics. Tubi TV has a frequency management tool that advertisers can use to avoid serving commercials multiple times (source). Pluto TV offers programmatic advert purchasing, allowing advertisers to bid on spots broken down by target audience, viewing times, and desired commercial location (source). Both platforms offer sophisticated tracking and metrics that give advertisers granular insight into the success of campaigns. 

In contrast, Netflix has historically been reluctant to reveal user data in too much detail, despite the capabilities of its top-secret recommendation algorithms. Additionally, there are technology hurdles Netflix will want to proactively look towards overcoming: as Tony Maglio, IndieWire Executive Business Editor, notes, “there’s a significant tech lift required to insert ads into the programming”. It remains to be seen how Netflix will handle the demands. However, given their newness to the market, investigating advertising technology platforms or partnerships will likely be necessary for now.  

Netflix’s Co-Chief Executive, Ted Sarandos, is hoping for a "pretty easy entry to the market" (Wall Street Journal) - a desire no doubt complicated by Netflix’s unique content quality and the nuances of advert-supported subscription pricing. However, as long as the company considers the points above and looks to existing AVOD models for guidance, it’ll have given itself the best possible start to its advertising journey.