Netflix unveils its ad-supported product

The key details:

• Ad-supported tier will cost $6.99 per month.
• It will be available in 12 countries, including Brazil, Japan, Mexico, the U.K. and the U.S.
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• Netflix will run pre-roll and mid-roll ads that are 15 or 30 seconds long.
• Viewers will be shown four to five minutes of ads per hour, on average.
• Targeting options will be limited to country and content-based categories at launch.
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• Starting sometime in 2023, advertisers will be able to use Nielsen’s Digital Ad Ratings to measure ads.

Programming and ad placement

While Netflix original programs such as “Emily in Paris,” “Glass Onion: A Knives Out Mystery” and “The Crown” will carry ads, not all TV shows and movies available to watch on Netflix will be available on the ad-supported tier. That’s because Netflix needs to renegotiate some of its deals with programming providers to insert ads into certain shows and movies. 

Netflix COO and chief product officer Greg Peters estimated that 5% to 10% of the service’s programming library will not be available on the ad-supported tier, with the percentage varying by country.

A challenge for Netflix in inserting mid-roll ads is that some programs were not created to accommodate ad breaks, such as Netflix’s own shows and movies it has licensed. Rather than automate this in-stream video ad insertion as digital platforms like Facebook do, Netflix appears to taking a manual approach. The company’s internal content tagging teams have been enlisted “to find those natural breakpoints so that we can deliver the ad in the least obtrusive point,” Peters said.

Not all movies available on the ad-supported tier will carry mid-roll ads, though. New movies will only carry pre-roll ads, Peters said. Meanwhile, movies “that have been on the service for a while” will carry pre-roll and mid-roll ads, he added.

For advertisers, “pre-roll has more value. There’s going to be more engagement in that,” said Vicky Chang senior director of media at TV and streaming ad buying firm Tatari. However, Netflix has not told advertisers or agencies whether it will provide insights or guarantees regarding ads running as pre-rolls versus mid-rolls.

As for the frequency with which people will see ads, Netflix will air “no more than four to five minutes of ads per hour and including some tight frequency caps so members don’t see the same ad repeatedly,” Peters said. He didn’t say what exactly those frequency caps will be, and a Netflix spokesperson declined to provide detail. But multiple agency executives said Netflix has told them it will limit individuals from being shown the same ad no more than once per hour and three times per day.

Targeting options

From an advanced advertising standpoint, Netflix’s ad product will be fairly basic at launch. For example, Netflix will initially stick to a fixed-price model for its ad sales rather than auction off inventory at variable rates. Gorman declined to say what CPM Netflix is charging advertisers, but Digiday previously reported that Netflix is asking advertisers to pay a $65 CPM. Additionally, advertisers will only be able to target ads based on programming genres as well as movies and shows featured in the service’s top 10 list, in addition country-based targeting. 

The targeting options at launch “are very limited, for sure,” said Brad Geving, vp of media buying and operations at Tatari. Having said that, “we do get a lot of value out of genre targeting because typically you are addressing viewers that are of a certain mindset or a certain interest set.”

Netflix’s targeting options won’t be permanently limited to content-based categories, though.

Netflix will be collecting users’ date of birth and gender when they sign up for its ad-supported tier, and the company plans to eventually enable age- and gender-based ad targeting, though not at launch, said Gorman. Eventually, Netflix will also enable “behavioral ads,” she said but did not provide details of what those targeting options would be.

Considering that Netflix will have registered users’ email addresses, the service could use that information to match accounts with third-party data for targeting purposes, such as web browsing data associated with Unified ID 2.0, data on household income and purchase histories from third-party data providers as well as advertisers’ own lists of customers’ email addresses. Netflix executives did not say on Thursday whether that type of email-based targeting will or will not eventually be available.

What will not be available are Netflix’s ad-supported user data for use outside of the streaming service. “Partners like Microsoft can only use this information in supporting ads on Netflix…. This will not be used to build profiles for targeting on any other service,” Gorman said.

Measurement

The lack of targeting options at launch may be just as well considering the limited measurement options that will be available until next year. Netflix has signed deals with DoubleVerify and Integral Ad Science to confirm the delivery and viewability of advertisers’ ads, but that measurement will not be available until the first quarter of 2023, Gorman said.

Then at some point in 2023, advertisers will be able to use Nielsen’s Digital Ad Ratings measurement to track the reach of their ads in the U.S. This will enable advertisers to understand how many people overall and in certain demographic segments saw a brand’s ad on Netflix and compare the service’s performance to other streamers and video platforms that support Nielsen’s DAR measurement, such as YouTube, Roku and Disney-owned Hulu.

Audience size

Netflix executives declined to say how many new subscribers the company expects its ad-supported tier to attract or how many of its existing subscribers may switch to the ad-supported tier. 

What could help Netflix accumulate ad-supported subscribers is the company’s ongoing crackdown on password-sharing. If people lose their free, unsanctioned access to Netflix, they may be more likely to pay $6.99 for the ad-supported tier than $15.49 for the standard, ad-free tier or $9.99 for the basic, ad-free tier. “That’s the dark horse in all of this,” said Geving.

Then again, there’s the issue of the ad-supported tier being worth the money. The absence of certain shows and movies may pose one barrier to adoption, but another may be Netflix limiting the ad-supported service’s video resolution to 720p in an era when TV networks and major streaming services like Hulu air programming in 1080p resolution and when more than half of U.S. households own TVs capable of the even higher 4K resolution.

“By limiting resolution, they’re implicitly saying they expect any cannibalization to be limited to only their lowest tier,” Geving said. “In that way, their revenue model is going to stay intact, and they’re not going to have a decrease in revenue as a result of this.”