The announcements are coming to Netflix soon – here’s what we can expect and what it means for the streaming industry

Ads are coming to Netflix, perhaps even sooner than expected.

The Wall Street Journal has reported that Netflix moved the rollout of its ad-supported subscription tier to November. The Sydney Morning Herald, meanwhile, is report that Australia is among the first countries likely to see ads on Netflix by the end of the year.

Netflix first announced that it would be introducing a new subscription tier at a lower price to be ad-supported in April. This was an about-face from a company that had built an ad-free on-demand television empire. In fact, it was only in 2020 that Netflix CEO Reed Hastings has ruled out advertising on the platform, saying “you know, advertising seems easy until you get into it”.

The change of opinion followed Netflix’s first quarter 2022 earnings report which saw a loss of subscribers for the first time in over a decade. The addition of ads to the platform is a clear sign of the emerging period of experimentation in the streaming landscape.

Read More: In a Market Drowned by Streaming Services, Netflix’s Massive Loss of Subscribers Is a Big Problem

How will it work?

It is important to note that not all Netflix membership levels will contain advertisements. The current plan foresees that there will be a newly introduced and cheaper subscription tier supported by advertising, with a target in the US market of approximately $ 7-9 USD per month as a price range. This will represent a discount from the current cheapest plan of US $ 9.99 (AUD $ 10.99) per month. These prices will be adapted to the different currency markets in which Netflix operates and the price ranges existing in those markets.

By bringing a hybrid advertising / subscription tier, Netflix is ‚Äč‚Äčadopting a business model already present on other streamers such as Hulu. Netflix maintains this hybrid tier, which means that while the new tier will be cheaper, it won’t be free, like the ad-supported streaming available on Peacock.

Advertising presents complex new technological and business challenges for Netflix, which has never worked in this market before. To enter this new market, Netflix announced it would be advertising provided through a partnership with Microsoft.

The collaboration with Microsoft has allayed some fears about Netflix’s entry into a new media market and gives Netflix access to Microsoft’s extensive advertising distribution infrastructure.

Netflix announced that the original film’s programming may remain ad-free for a limited time upon release and that both original and some licensed children’s content will remain ad-free.

In addition to staying away from advertising for children, which in Australia is heavily regulated by government and industry codes, Netflix also avoids any buyer of cryptocurrency advertising, political advertising and gambling.

The advertising will run around 4 minutes per hour of content, as Australia’s free-to-air commercial TV networks are limited on their main channels to 13 minutes per hour and 15 minutes per hour on multichannel between 6am and midnight.

Netflix will also have limits on the number of times a single ad can be shown to a user, and ads for movie content are expected to run in a pre-roll format, without interrupting the feature.

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Advertising in the streaming industry

Netflix isn’t the only subscription service to announce advertising as part of new pricing strategies. Earlier this year Disney has announced a very successful quarter from a subscriber absorption perspective, up by 15 million subscribers, however, streaming-induced losses were $ 300 million more than estimated.

Disney also announced that an ad-supported Disney + subscription option will be available in December. The Wall Street Journal reported the December timeline provided by Disney is what prompted Netflix to move forward with their advertising plans.

Television consumers have historically been well accustomed to television advertising: in Australia, free-to-air commercial networks Seven, Nine and Ten carry advertising, public broadcaster SBS carries a limited amount of advertising, and even pay-TV provider Foxtel is supported by both subscription fees and advertising. Advertising itself isn’t new to audiences, but it has never been featured on a number of premium streaming platforms like Netflix before.

Streaming platforms like Netflix and Disney + are looking for ways to both reach new audiences and maximize each user’s revenue. There is a belief among high-level executives that providing a cheaper ad-supported tier will appeal to the market for audiences who don’t care about advertising and who see current subscription prices as too high.

There is also evidence from other streaming platforms, such as Hulu and Discovery +, which have offered ad-supported subscription levels, that these levels can generate higher average revenue per user. (ARPU) compared to the more expensive subscription-only levels.

ARPU is a metric used in the streaming industry that examines how much money a company makes from each subscriber after deducting business costs. Getting more revenue from a subscriber can be brought about by raising subscription prices, driving subscribers to more expensive subscription tiers, reducing business costs, or adding additional revenue streams such as advertising.

In 2021, Discovery CEO David Zaslav noted that Discovery + was generating more revenue per subscriber from their cheapest ad-supported tier than their more expensive subscription-only tier thanks to ad revenue. Zaslav commented that advertisers wanted to reach audiences that were largely not accessible through other television media.

With this in mind, Netflix and Disney are betting that their ad-supported tiers can work in a similar way and increase the revenue they can generate per subscriber.

Experimentation in the streaming sector

Experimentation around established business strategies is governing the current streaming landscape.

HBO Max, under the newly merged parent company Warner Bros. Discovery, is now moving to licensing content in select markets rather than streaming on its own platform. With the airing of the Lord of the Rings prequel, The Rings of Power, Amazon Prime Video is finding out whether its experiment with the most expensive TV production ever at $ 715 million (A $ 1.05 billion) will give its fruits to the public.

Read more: The new prequel to The Lord of the Rings, The Rings of Power, is set in the Second Age of Middle-earth – here’s what it means

There is experimentation in the streaming industry in licensing strategies, TV shows, pricing models, and more. The results of this experimentation will take time. But what the arrival of advertising on Netflix signals is that the established strategy no longer governs the streaming landscape.

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