Dive Brief:

• Netflix aims to launch an ad-supported tier in early 2023, executives said when discussing second-quarter earnings results. 
• While Netflix is busy clearing more licensed content for the offering, Co-CEO and Chief Content Officer Ted Sarandos said “certainly not all” of Netflix’s library would be available for the lower-priced option. At the same time, the executive doesn’t view the smaller catalog as a “material holdback” for the business.  
• Details on the rollout arrive shortly after Netflix announced Microsoft as its exclusive ad-tech and sales partner. Questioned about the pick, Chief Operating and Product Officer Greg Peters reiterated that Netflix values Microsoft’s focus on data privacy and a shared ambition to create a new advertising model for premium connected TV (CTV).  

Dive Insight:

Netflix gave more color on plans to differentiate its hotly anticipated ad-supported tier from the current industry model as it shoots for a debut early next year. Consumers interested in the lower-priced option can expect to see less content licensed from other studios, though executives assured that the “vast majority” of what people watch on the streamer will be available. 

Rivals like Hulu, Peacock and HBO Max already offer ad-supported options while Netflix strongly resisted the idea until earlier this year, when it was roiled by cooling subscriber growth. Some competitors have experimented with ways to reward streaming-specific behaviors, like binge-watching, but most paid media activity tends to center on traditional video placements. 

In response to an analyst question about choosing Microsoft — largely viewed as a dark horse candidate — Peters cited “a high degree of strategic alignment” in desiring to innovate a “new ads ecosystem around premium TV [and] connected TV ads.” The executive also called out shared thinking in regards to ad frequency capping. Repetitive ads are an issue that has long dogged the CTV space and proved frustrating for viewers. 

Linking with Microsoft on serving ads hasn’t seemed to limit Netflix’s partnerships elsewhere. It will continue to work with Amazon Web Services on cloud-based technology support, for instance. 

“We'll look for those opportunities as they exist with Microsoft and with other companies as well,” said Peters. “I would say this doesn't foreclose on anything like that.” 

Netflix has ramped up its bets in the gaming arena recently, another area of potential synergy with Microsoft, which has deep expertise in the space thanks to Xbox.  

A lingering question for Netflix amid the ambitious push into advertising is whether users will bite. Price sensitivity is a factor to consider. Given rising inflation and a worsening macroeconomic picture, a cheaper Netflix might hold appeal, even if the full library isn’t on deck.

“When the company launches its ad-supported tier in early 2023, it will provide cost relief to its ad-tolerant users who are feeling the price pinch while also attracting new, price-conscious users who have been reluctant to pay a premium price point,” said Mike Proulx, research director at Forrester, in emailed comments.

For brands, the chance to message around Netflix content has long been on the wish list. 

“I would say the initial response that we're getting from a brand and an advertiser perspective is quite strong,” said Peters during the earnings discussion. 

That said, Netflix doesn’t expect the introduction of ads to change the business overnight.

“[This] is going to start small relative to our total revenue mix, but we think we can grow it to be substantial over a period of time,” said Peters. 

Netflix in Q2 saw fewer subscriber losses than expected, with 970,000 accounts dropping the service versus the 2 million the streamer previously projected. The platform delivered some concrete hits over the period, including the fourth season of “Stranger Things,” its most-watched English-language series. Beyond advertising, the company plans to crack down on account sharing in the months ahead. 

A shrinking audience still starkly contrasts with earlier in the pandemic, when Netflix experienced meteoric growth as people sought to keep themselves entertained at home. That said, Netflix stock popped on the better-than-expected subscriber figures.