Netflix with ads could be a big win — if it doesn't play by the old rules

This article was first featured in Yahoo Finance Tech, a weekly newsletter highlighting our original content on the industry. Get it sent directly to your inbox every Wednesday by 4 p.m. ET. Subscribe

Wednesday July 20, 2022

Netflix is getting ads, and I'm on board

Ads are coming to Netflix (NFLX). I know, I know. It sounds like a monstrous mistake. We signed up for Netflix to watch our favorite shows commercial-free. But Netflix is hurting. And an ad-supported tier could help return the company, which is losing subscribers and watching revenue slow, return to the kind of growth investors fell in love with.

But Netflix will need to ensure that its new ad-supported experience isn’t overbearing. Consumers aren’t going to sign up for a platform that smashes them in the face with 15 minutes of ads for 30 minutes of content.

“Ad-supported feels like a useful move for consumers and for these companies,” explained Forrester VP and principal analyst Joanna O’Connell. “And yet, how do they do it in a way that doesn't suck? I mean, that is the billion dollar question for me.”

Netflix’s needs to tread carefully when it comes to ads

Shares of Netflix have collapsed an almost unfathomable 66% year-to-date, and on Tuesday it reported that it lost 970,000 subscribers in Q2. That’s better than prior expectations of 2 million people ditching the platform but not exactly a win.

That report follows Netflix’s gloomy Q1 earnings when the company announced it lost 200,000 paid subscribers when it was expected to add 2.5 million users. Revenue growth, meanwhile, has slowed significantly from its double-digit highs amid the pandemic.

Netflix attributes its struggles to increased competition from the likes of Disney+, COVID, and the war in Ukraine. Oh, and the 100 million users watching without paying via shared usernames and passwords.

Netflix can try outgunning the likes of Disney (DIS) and its arsenal of properties including “Star Wars” and “Marvel,” but it certainly can’t do much about COVID or Ukraine. And it’s likely to face blowback when it begins charging users extra to share accounts.

That said, I’m actually interested in the prospect of an ad-supported version of the streaming service. That’s especially true at a time when inflation is pushing prices of everyday goods higher and the number of streaming services with must-see content seems to multiply every month.

FILE - This photo shows the company logo and view of Netflix headquarters in Los Gatos, Calif., Jan. 29, 2010. Netflix shed almost 1 million subscribers during the spring amid tougher competition and soaring inflation that’s squeezing household budgets, heightening the urgency behind the video streaming service’s effort to launch a cheaper option with commercial interruptions. The April-June contraction of 970,000 accounts, announced Tuesday, July 19, 2022, as part of Netflix’s second-quarter earnings report, is by far the largest quarterly subscriber loss in the company’s 25-year history. (AP Photo/Marcio Jose Sanchez, File)
Ads are coming to Netflix, and I don't hate the idea. (AP Photo/Marcio Jose Sanchez, File) (ASSOCIATED PRESS)

But if Netflix wants its ad-supported tier to boost user growth, it’s going to have to make sure that the ads experience is better than what we get out of traditional TV ads.

Unfortunately, O’Connell explained, connected TV has, so far, taken some of the worst habits of TV and somehow made them worse. Specifically, O’Connell points to streaming services that are overrun with collections of back-to-back-to-back ads known as “ad pods” that play the same commercials over and over again until it feels like Mr. Clean is trying to brainwash you.

“It feels like we're overrun with ad pods and we're overrun with ads within the ad pods,” O’Connell said. “Who the heck is steering the ship? Why am I getting the same ad three times in a row?”

“It is challenging to manage the complexity of [connected TV] advertising,” O’Connell said. “If you're a publisher it feels more like getting the business rules in place and having the will to really improve the experience when that can feel like a risk to revenue.”

Fortunately, some [connected TV] platforms have already begun experimenting with unique ad formats that aren’t as aggressive or downright annoying. Roku, for instance, runs ads on its screen saver page, and its main menu, keeping you from being bombarded while watching shows, while still getting plenty of eyeballs on those ads.

I’m willing to give it a shot. You should, too

Netflix is teaming with Microsoft to get its ad-supported tier off the ground. The Windows maker is already operating a multi-billion ad business, and adding those capabilities to Netflix should ensure that the streaming service’s ad tier is stable when it launches in 2023.

Right now Netflix is an in-the-background option for me. My wife and I switch it on when nothing else is on, or if we’re cooking or cleaning and need background noise. In those instances, an ad-supported option would be a welcome means to save some cash. We’re not exactly watching with rapt attention in those cases, so we wouldn’t mind a few ads now and then.

Again, as long as it’s not the same three ads playing in a row. Or too many ads relative to the length of the show or movie we’re half-watching.

When a cultural juggernaut like “Stranger Things” or “Squid Game” comes along, I could see us upgrading to a commercial free tier for a month or two to skip the ads. Once we finish the show, though, we could drop back down to the ad-tier.

Netflix readily admits in its Q2 earnings report that its dive into advertising will change over time, and that the final iteration will be far different from what it initially launches. It also promises to try to offer something better than the horrible experience we’ve grown accustomed to through traditional TV.

Now the streaming behemoth just needs to deliver.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

Click here for the latest technology business news, reviews, and useful articles on tech and gadgets

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube