Now that Netflix is getting into the ad business, the streaming giant needs to figure out how to incorporate ad breaks. A logical first step would be to partner with ad tech platforms like The Trade Desk, according to ad industry watchers.
On Tuesday, Netflix executives revealed that the platform would finally start selling ads, within one to two years. Netflix had just released its first-quarter earnings report that showed a drop of 200,000 subscribers and exposed other challenges to the business, which made it necessary to at least test ads.
“Think of us as quite open to offering even lower prices with advertising,” Netflix co-CEO Reed Hastings said Tuesday after announcing the earnings.
The next step for Netflix is to develop an ad infrastructure, connecting its connected TV and mobile apps to the programmatic online ad marketplace. “They have no choice but to partner,” said Andre Swanston, senior vice president of media and entertainment vertical at TransUnion, the consumer data technology platform. “They couldn’t move fast enough to develop their full capacity.”
The Netflix advertising business has suddenly become one of the most talked about properties among ad agencies and connected TV tech companies who would like a piece. “Netflix has one of the most coveted connected TV inventories in the world right now,” said Adam Epstein, co-president of Perpetua, an ad technology software company.
Swanston and Epstein said it would make sense for Netflix to choose a partner like The Trade Desk, which runs an on-demand platform for brands to run ads on connected TVs and the web.
Netflix could also theoretically work with Google, Amazon or Roku, or a sales platform like Magnite, Epstein said. But Trade Desk has developed a reputation for partnering with media companies and publishers on ad technology, including its recent partnership with Walmart to build an ad platform designed for the retail giant. Disney also recently announced that it was “exploring a path to activation with The Trade Desk” by launching an ad and data platform for connected TV. According to Swanston:
“Netflix has been very good at licensing and producing content that specifically resonates with different geographies. They should use that same mindset to customize these ad templates.”
Historically, Netflix has been advertising averse, touting “no ad interruptions: Enjoy all the entertainment without interruptions,” according to its in-app store marketing lingo. But the ad-supported video-on-demand market has become too big to ignore, and viewers have shown some willingness to pay lower prices for services that have ads, like Hulu. Meanwhile. Netflix’s rivals are starting to make money through digital advertising on connected TVs, including Disney, which owns Hulu, ViacomCBS, NBCUniversal, WarnerMedia and others.
The US connected TV ad market will grow to $19.1 billion this year from $9 billion in 2020, according to eMarketer. Meanwhile, TV ad spending is expected to peak this year at $68.4 billion in the US before starting to decline in the next few years, eMarketer said. At the same time, Netflix is having a hard time retaining subscribers, dropping 200,000 accounts in the last quarter to 221.6 million subscribers. The company also predicts it could lose another 2 million subscribers this quarter and is dealing with the password-sharing phenomenon, which affects its ability to monetize the service.
That’s where the ads come in: It’s unclear what lower price Netflix would have to set to attract enough consumers to opt for the ad version, but there are signs that consumers are willing to pay less to support the ads. A recent report by Kantar said that one of the biggest reasons people cancel subscription services is because of the price. Of Netflix users surveyed, 26% canceled to save money, Kantar found. Price wasn’t the only reason, however. Viewers are also making subscription decisions based on content, and Netflix has greater competition from Disney, ViacomCBS, Amazon and others.
Netflix may change its fortunes with advertising because brands have been interested in reaching their audience for years. And Netflix is sitting on a mountain of data that can help target ads. “Netflix may partner with someone from an identity or data resolution standpoint” said Swanston. Adam Helfgott, CEO of MadHive, a programmatic ad technology company, commented:
“Netflix already has a trove of first-party data that can deliver a variety of audience segments for advertisers and relevance to consumers. To sell this inventory in the overall TV context for the advertiser’s goals, they will need to integrate into the ecosystem and partner with DSPs, SSPs and infrastructure providers.”
On Tuesday, Hastings mentioned how Netflix could proceed with advertising through partnerships: “We can be a direct publisher and have other people do all the fancy ad matching and integrate all the data about people,” Hastings said. .
Advertisers see another potential avenue to explore with Netflix, other than inserting ads into shows; they also want to integrate into the programs. This is an area where Netflix has been less flexible than other platforms, according to Swap Patel, executive director of media at advertising agency McKinney. When brands are mentioned on Netflix shows, like Eggo waffles on “Stranger Things,” it can be a powerful marketing opportunity.
Last year, Duolingo, the translation app, enjoyed an appearance on “Emily in Paris”. “Netflix is not the same as your typical advertising entities,” Patel said. “As this offering grows, they will discover some version of this [integração de marca]to communicate the vastness of Netflix’s audience, the value and mechanics of how to reach them.”
Brad Dixon, co-founder and executive creative director of Special Operations Studios, the creative agency, agreed that Netflix could offer a combination of targeted ads and branded integrations. Netflix already has its own e-commerce store that sells products tied to its shows, some through collaborations with brands like Nike and Balmain.
“Showing integrations plus native ad units, or any combination of the two, would be nice from a creative standpoint,” said Dixon.
This article is a translation of the writing by Garett Sloane to the website AdAge.
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