Netflix Wants to School Viewers on Ads Experience to Boost Sign-Ups

When was the last time you willingly signed up for an ads experience? In times of rising costs and inflation, a more affordable ad-based streaming option might not seem as undesirable when compared to an ad-free plan.

But that’s an issue Netflix is looking to tackle as the streaming giant sees an opportunity to “educate consumers.”

“I think what we are seeing is that in some of our countries consumers think about an ads experience mostly anchored in linear and what their expectation around ad load frequency rates are,” said Netflix Co-CEO Greg Peters on Wednesday (Oct. 18) during a Netflix Q&A session.

Peters notes that, to a certain degree, several of Netflix’s streaming rivals have not been as successful in creating an ads experience that meets customer expectations. A key aspect of this challenge revolves around the necessity of informing consumers about the Netflix ads experience, allowing them to make decisions based on their individual preferences.

Opportunity for Netflix

Drawing from insights gained from their ad-free model, the streaming giant can transform the ads experience for hesitant consumers and educate them on what a quality advertising experience involves. This can be achieved by ensuring that ads are relevant to the viewer’s interests, reducing intrusiveness and repetition, and emphasizing personalized ads experiences.

Peters said, “We’re working with Microsoft right now on targeting. So, you’ll see that rollout in the near future. And that I think, this is the first step of how we think about increasing, targeting relevance through both the combination of products set.”

In July, PYMNTS reported that Netflix initiated a restructuring of its advertising partnership with Microsoft, just one year into their collaboration. The streaming giant opted to reduce ad prices to invigorate the emerging segment of its business.

Within the company, certain Netflix executives expressed their frustrations with Microsoft’s performance in selling ad inventory, according to individuals familiar with the situation. Consequently, due to soft sales and a less-than-anticipated ad market, Microsoft had to fulfill the maximum payment requirement established in the agreement made a year ago, when Netflix selected Microsoft as its partner in the launch of the ad business, as stated by an insider familiar with the partnership.

At the time, when asked to update his previous remarks about achieving a 10% ad revenue contribution, Netflix CFO Spencer Neumann stated during a Q2 earnings presentation on July 19, “We believe it can be a meaningful part of our business. When we say 10%, it’s in part because we wouldn’t spend all this effort, time and energy, resource allocation, senior management focus … if we didn’t think it could be at least 10% of revenue.”

However, he also mentioned, “There’s a lot of branded TV ad dollars that we set our sights on over time because we think we’re a great ecosystem and environment to collect that demand, but we have to prove it out over time. So [we’re] not ready to kind of increase our long-term projections from one we haven’t even really come close to getting to yet.”

Netflix by the Numbers

In Q3, Netflix’s financials outperformed expectations, recording $8.5 billion in revenue, gaining 9 million paid subscribers, and achieving a robust 22.4% operating margin.

Netflix’s FY23 free cash flow is now anticipated to reach about $6.5 billion, an increase from the prior projection of at least $5 billion. During Q3, the company repurchased $2.5 billion worth of shares and expanded its buyback authorization by an additional $10 billion.

Netflix’s advertising plan continues to witness growing adoption, with a nearly 70% increase in ads plan memberships quarter-over-quarter. Additionally, an average of 30% of new sign-ups in regions with ads plans opt for this offering.

The company acknowledges that there is still work to be done to further expand this aspect of their business. Their $6.99 per month ads plan in the United States remains instrumental in supporting the growth of their ads plan service.