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Text｜Swordsman

On July 18, Netflix released its second quarter performance report: the number of global subscribers increased by 8.1 million, down from 9.3 million in the first quarter. Netflix also revealed that it will stop regularly reporting new user data next year.

This seems to indicate that subscribers are no longer the highlight of performance growth.

Advertising has become more important than ever. However, according to the forecast of eMarketer, an advertising market analysis agency, Netflix's US advertising revenue this year is only US$950 million, which accounts for only 0.9% of the total US video advertising expenditure. Considering that Netflix launched its advertising business at the end of 2022, the low base is understandable.

In recent times, Netflix, which has always been very indifferent to its advertising business, has been constantly replacing senior executives in its advertising business, getting involved in the price war initiated by Amazon, changing its subscription packages, and building its own advertising system... In short, Netflix has become aggressive about advertising, as if it had been injected with chicken blood.

01 Engaged in advertising price war

In the United States, streaming services have become a fiercely competitive red ocean market. Platforms continue to open membership subscription packages containing advertisements, and the supply of commercial traffic continues to increase.

In the video advertising market surrounded by strong competitors, Netflix is ​​facing an aggressive and fierce attack from Amazon.

On January 29 this year, the advertising service of Amazon's streaming service Prime Video was officially launched, setting ad viewing as the default option for users. In other words, all Prime subscribers will automatically see video content with ads.

This is a killer move, considering that streaming services such as Netflix retain expensive ad-free subscription packages, which is an important source of cash flow.

However, Amazon, which is used to dominating the e-commerce field, directly turned the table over in the advertising market and started a price war based on CPM (advertising cost per thousand).

When Disney first introduced its streaming service Disney+ to advertisers and their agencies, it hoped that the CPM would be $50. When Netflix entered the advertising market at the end of 2022, its offer was close to $60. When Amazon first entered the market, its offer was cut in half to about $30 CPM, which attracted a large number of advertisers to Prime Video.

As a result, Amazon's advertising revenue grew 24% to $11.82 billion in the first quarter, with Prime Video advertising contributing a significant amount.

Although Amazon offers a service that allows users to watch without ads for an additional $2.99 ​​per month, third-party agency eMarketer predicts that 80% of Prime Video users will choose a subscription package with ads because Amazon provides fewer ad spots and durations than regular TV for the sake of user experience.

Almost overnight, Amazon became the biggest disruptor in the streaming advertising market.

Netflix was naturally the first to be hit and was forced into a price war: CPM dropped to about $29-35, far lower than the $55 to $65 it had expected when it previously tried to enter the advertising market.

This is certainly good news for budget-conscious advertisers.

Currently, Apple TV+ is the only service that has not yet been connected to advertising services. However, in March this year, Apple hired Joseph Cady, a senior advertising executive at NBCUniversal, which once again sparked rumors that Apple will launch advertising-supported services. If Apple TV+ also enters the advertising market in the future, the supply of high-quality traffic will increase again, and Netflix's CPM price war will continue for some time.

02 Expand advertising inventory

Previously, Netflix users could choose from four subscription packages:

1. The "Standard Edition" with ads, the package price is $6.99 per month;

2. The "Basic" ad-free subscription service costs $11.99 per month; 3. The ad-free "Standard Edition" package costs $15.49; 4. The ad-free + ultra-high-definition Premium version costs $22.99.

In order to expand advertising inventory, the top priority is to expand the number of paying users of advertising packages. To this end, Netflix has taken three key actions.

KR1: Eliminate the basic ad-free package

In July this year, Netflix gradually cancelled its cheapest $11.99 ad-free package. It is not difficult to see that Netflix deliberately increased the price gap between ad-free and ad-supported packages, so users can either spend an extra $3.5 per month to choose the standard package or choose the $6.99 package with ads.

KR2: Combat password sharing

In order to expand the traffic pool for advertising and expand advertising inventory, Netflix has cracked down on users' password sharing behavior: an account can only be used by one family member. In the United States, paying users can add a member outside their own family, but they need to pay an additional fee of at least $7.99 per month.

This obviously further raises the viewing cost for ad-free users. In order to save money, users will naturally choose the cheaper 6.99 ad-containing package.

KR3: Bundled sales strategy

When it comes to selling subscription services, bundling sales strategies between streaming platforms are very popular in the United States.

However, Netflix is ​​still very cautious. Its consideration is to first ensure that bundling does not reduce its existing subscriber base. Moreover, the meaning of bundling services is to sell them to users at a lower price, which will undoubtedly reduce Netflix's profit margins.

According to a report in June by subscription research company Antenna, compared with other streaming platforms, Netflix has a significantly higher proportion of long-term subscribers than new subscribers or users who have previously canceled their subscriptions. If Netflix opens up bundled sales, a large number of subscribers will switch to cheaper bundled packages.

However, Netflix has also made concessions to expand subscriptions to its ad-supported packages. For example, U.S. mobile operator Verizon has launched a bundle service that combines the ad-supported version of Netflix with a Max membership from Warner Bros. Discovery Channel for $10 per month.

Through the above efforts, in the second quarter of this year, the number of users of Netflix's ad-supported subscription packages increased by 34% month-on-month, and more and more newly registered users prefer ad-supported membership packages: in the third quarter of 2023, the proportion of users supporting ad-supported packages was 30%, and in Q2 of this year, the proportion was already 45%.

03 Self-built advertising system

As mentioned earlier, Netflix's advertising business has a very low base and has yet to truly prove itself in terms of revenue.

CFO Neumann disappointed investors by saying advertising would not become a "significant contributor" to revenue until 2026.

Indeed, Netflix's progress in the advertising business is too slow and too slow.

While Prime and Disney+ have already started selling their advertising inventory through programmatic channels, Netflix has been slow to act and is expected to join the programmatic buying channel in August this year.

Slow business progress is related to frequent changes in the executive team.

After less than two years at the helm of Netflix's nascent advertising business, 2023 President of Global Advertising Jeremi Gorman left the company a year after joining, and Vice President of Advertising Sales Peter Naylor will leave in the near future.

The company is reshuffling its advertising management team for the second time in less than a year.

This reflects that Netflix does not have a mature understanding of the advertising business. Gorman was an early employee of Amazon's advertising business and later served as Snap's chief business officer; Naylor has held senior advertising sales positions at NBCUniversal, Snap and Hulu. Both seem to have perfect resumes, but their advantage is that they have extensive connections in the advertising industry and are good at large customer sales.

However, Netflix frequently expands its advertising inventory in order to make a difference in performance advertising. Performance marketing does not rely on customer relationships. What is important is the improvement in marketing efficiency brought about by advertising products and technologies, which is what Naylor and Gorman are not good at.

The frequent changes in the executive team also reflect Netflix's anxiety and strategic vacillation in its advertising business.

For example, the cooperation between Netflix and Microsoft has always been in an on-and-off relationship.

In May, Netflix announced that it would end its cooperation with Microsoft and build its own advertising technology platform, which will cooperate with The Trade Desk, Google Display & Video 360 and Magnite to provide programmatic advertising solutions.

There are many benefits to breaking away from Microsoft and building its own platform. The internal platform can provide advertisers with better data and results, and enhanced advertising measurement and verification capabilities can improve the effectiveness of advertising campaigns, thereby further enhancing Netflix's attractiveness to advertisers.

While the industry is looking forward to Netflix's development of streaming advertising technology, in July this year, Netflix announced that it would expand its partnership with Microsoft to manage connected TV (CTV) advertising on the platform.

Obviously, Netflix has the ambition to build its own advertising technology stack, but it lacks the ability to do so. On the one hand, this partnership may reduce the profits of Netflix's advertising business, but on the other hand, it can help it quickly enter the high-demand CTV market.

Netflix's continued vacillation has made its advertising business direction unclear and progressing very slowly. Its self-built advertising platform will not be launched globally until the end of 2025. You know, Amazon's Prime advertising business has been booming just six months ago. Who can guarantee that the sky of streaming media will not change after a year and a half?

04 Is the advertising era back?

Streaming media platforms initially adopted an advertising model, but when it developed to Netflix, the subscription model has always been dominant.

However, the trend has changed and the subscription model has also encountered difficulties. With the emergence of more and more streaming services, users need to pay subscription fees for multiple platforms, which not only leads to subscription fatigue, but also many users choose to cancel their subscriptions due to high total costs. According to a report by Deloitte, 44% of users have canceled their subscription services in the past 6 months.

Nowadays, even Netflix, the big brother of the subscription model, is making a big splash to earn advertising fees, which undoubtedly indicates that the streaming media platform is returning to a certain extent from the subscription model to the advertising model.

In contrast, the advertising business of domestic online video platforms has been squeezed. iQiyi's advertising revenue has continued to decline for many years: in 2019, advertising revenue was 8.3 billion yuan, contributing 28.6% of revenue; by 2023, advertising revenue fell to 6.2 billion yuan, and the contribution rate had fallen to 19.4%. After all, it failed to buy into the 10 billion yuan club of advertising revenue.

However, this is related to different market environments. For paid video membership, there are only iQiyi, Youku, Tencent Video and Mango TV in China, and at most Bilibili. The market competition is not fierce, and everyone can make a living in the membership market. In the advertising market, they have to face competition from strong advertising platforms such as Douyin, Video Number, and Kuaishou.

In the United States, there are more than a dozen mainstream streaming platforms, and the competition is fierce, so platforms not only need to attract paying members, but also need to generate advertising revenue.

I also found that some domestic brand advertisers have begun to return to online videos from short video platforms, especially the investment in TV series has broken industry records. Moreover, many online video platforms are actively deploying programmatic advertising products to expand the growth space of performance advertising, and have achieved good results.

These are all positive signals for the online video advertising market. Perhaps in the near future, iQiyi, Youku and Tencent Video will once again be crowded with advertisers.