In the first quarter of the year, Amy Reinhard, Netflix’s new advertising chief, concluded her meet-and-greet with the European advertising industry in London.
During her stay, she met with GroupM executives to learn how they prefer to work with Netflix and, more importantly, what their expectations are. During that conversation, she learned a key piece of information: GroupM’s London office serves as a gateway to the company’s global operations. Any global deal with GroupM would start right there, in the room where she was learning how employees operate, according to someone familiar with the meeting.
At first glance, this may seem like just a casual observation. But upon closer inspection, it highlights Netflix’s current position in the advertising world: A year and a half into its advertising venture, Netflix has made some progress, but is still figuring out the finer points of the game.
And don’t let the shiny numbers from the streamer’s second upfront dance blind you. The 150% increase in ad spend 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 still a lot of work to do.
But Netflix’s advertising strategists should not be shocked. They have always played the long game. That’s why they set high advertising prices, kept the advertising load limited and made the advertising tier opt-in rather than opt-out. They made it clear from the start that it would take some time for the advertising business to reach critical mass.
What those executives probably didn’t realize was how competitive the ad business would be – especially after Amazon put a dent in the streaming advertising market in February by switching its entire Prime Video subscriber base to an ad-supported version. Suddenly, the high prices Netflix was charging for a relatively small audience seemed even more hefty.
“I was discussing with my purchasing manager why we weren’t advertising on Netflix, and their argument was that ‘it costs too much and the reach is limited,'” said a media specialist at a CPG advertiser who traded anonymity for candor.
Such openness is hardly new to Netflix’s advertising executives. Since the advertising platform launched in fall 2022, they’ve heard variations of these concerns. And since then, they’ve been working to address them whenever possible.
Take ad rates, for example. Netflix has cut its ad rates from 60 CPM in 2022 to around $29 now. Advertisers have taken note and adjusted their budgets accordingly, reflected in the numbers Netflix announced as part of its upfront deals. But even with these adjustments, Netflix’s ad costs still lag behind those of Amazon, 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 offering.
“For those who already felt it was too expensive, not much has changed until now,” said Andrew Sandoval, vice president of biddable media at Croud. “As the technology has matured and the user base has grown, the perception has changed slightly. However, if you’re on a tight budget, it’s still a very high-value purchase that’s hard to justify compared to other more efficient and full-featured CTV offerings.”
Advertisers like Sandoval have been raising these concerns all year. They see Netflix addressing its scale issues and advancing its technology, but that’s not enough to convince them to spend big now.
“They are in the crawling phase of their crawling, walking and running,” said Natasha Tibbett, vice president of media at Swell Media.
The final quarter sums up this fight perfectly.
In countries with ad-supported subscriptions (including the US, UK and Australia), it now accounts for 45% of all sign-ups, up from 40% in April. This growth is due to a 34% increase in members subscribing to the ad-supported subscription in the second quarter, up from 65% in the first quarter and 70% in each of the previous two quarters.
As impressive as these gains are for a company founded less than two years ago, the growth is not as substantial as it could have been.
Internally, conflict between advertising and product teams is hindering the execution of the strategy, according to two marketing experts who confirmed a report by The Information about these tensions. Netflix has denied these claims.
Externally, the streamer balances between advertising load and viewer satisfaction while continuing to appeal to a global audience.
Add to that the cooling digital advertising market and fierce competition from low-cost companies. This is a difficult task for Netflix’s advertising managers.
What makes it even more difficult is that these executives must bridge the gap between Netflix’s original advertising vision and its evolved version. The departures of Jeremi Gorman and Pete Naylor last year underscore just how wide that gap is. At some point between their arrival and their departure, Netflix’s plan took a turn — it shifted from how advertising is sold to how it is bought.
While it’s a subtle shift, it drives Netflix’s growing obsession with advertising technology.
And like all obsessions, this one has led Netflix to make some bold – and potentially questionable – moves. The most notable example? Abandoning the Microsoft ad server that helped the company launch its programmatic business two years ago in favor of launching its own platform worldwide by the end of next year. That’s a difficult proposition for companies with established programmatic businesses, let alone a newcomer like Netflix.
The only reason Netflix is taking this risky step is because while it can’t offer marketers a huge audience, it can still promise serious impact.
For example, a hit movie like the latest Beverly Hills Cop, which is on Netflix and was the most-watched show in the U.S. last month, according to Nielsen, might be more attractive to deep-pocketed advertisers than ads where total reach is harder to determine. In other words, Netflix’s programming is more attractive to audiences it has limited data on, advertisers say.
This is where programmatic could help.
If enough marketers embrace the idea of impact, not necessarily reach, for advertising on Netflix, the streaming service could quickly make money with programmatic advertising. After all, it’s worked for YouTube. Who’s to say Netflix can’t use the same playbook again? Senior executives there haven’t exactly been hesitant to loudly proclaim the parallels between the two streaming platforms.
“If you look at the Nielsen data for June, you can see that Netflix and YouTube are the clear leaders in direct-to-consumer entertainment,” said Netflix co-CEO Ted Sarandos. “So we and YouTube represent about 50% of all streaming services on TV in the U.S. And we’re only using the U.S. because that’s where we have the data. So we’re really focusing on the other 80% of total TV time that doesn’t go to us or YouTube.”
And few things can draw as much attention as live sports. Netflix knows this, which is why it spent less than $150 million (per game) to broadcast two NFL games on Christmas this year.
But here’s the hard part: turning those broadcasts into profit. Netflix needs the technology to dynamically insert targeted advertising during these events, and it also needs to navigate the complex negotiations involved in striking such deals – a challenge made even more challenging by the timing of these games. The reported $5 million price tag Netflix is asking advertisers for these games? That’s going to be a tough sell.