Netflix’s Ad Nauseam Strategy

August 23, 2002 | Doug Montgomery | Senior Advisor – SVOD, premium networks, foreign content

The summer of 2022 brought some news to the entertainment industry that surprised no one. For the first time, according to Nielsen, time spent watching streaming video exceeded watching cable. This should have been a crowning moment for the OG of streaming, but Netflix stock, down more than 50% in 2022, saw muted activity. Slowing international growth and declining domestic subscribers have Netflix looking to exploit its IP in very old-school Hollywood ways, including gaming and advertising.

Next, Games

In March of 2022, Netflix announced it was acquiring Next Games, publisher of Stranger Things: Puzzle Tales, which was spun from the streamer’s global TV hit, Stranger Things SSN4. That same month, it was reported less than 1% of Netflix subscribers played its games. To its credit, Netflix said early on it didn’t expect games to be immediately profitable. It would take several years to reach break-even, same as its SVOD service.

These days, Netflix sits near the top of Hollywood, the spotlight on its performance. It burns much brighter than it did during the early days of SVOD. Insiders say Netflix’s gaming strategy is the classic “solution in search of a problem.” In other words, Netflix needs games more its subscriber base does.

Next, Ad-Free Options

Since its inception, Netflix repeated ad nauseum it would remain ad-free. Even as recently as March 2022, Netflix CFO Spencer Neuman said advertising was “not in our plans.” The drop in domestic subscribers in the spring of 2022 resulted in a major about-face for Netflix, as well as its position on ad-supported video.

A scant month later, Reed Hastings announced that, due to pressure on its ad-free subscriptions, Netflix would soon introduce less expensive ad-supported options, providing consumers more choice (this was the expressed rationale). This announcement shook the entertainment industry and fueled all sorts of speculation of how exactly Netflix would go about doing so.

Another big surprise was Netflix’s choice of Microsoft as its ad-solution partner. Microsoft was a dark horse in this race (favorites were Google and Comcast), but Microsoft has a much smaller video business (and much larger gaming business), so it does appear to be a great choice. Launch is expected in early 2023.

Next, New Levels of Interactivity(?)

A long-term goal of the entertainment industry was to enable video viewers to engage more deeply with content. Traditional broadcast and cable TV was a one-way transmission with extremely limited upstream. The ability to support content interaction was simply not there. The arrival of two-way broadband connections allowed streaming video technologists to leverage the powerful upstream capabilities to deliver levels of content interconnectivity never seen in video. Take, for example, Amazon Prime’s Xray, a feature that overlays information on the screen as you watch. This has been a part of Prime Video’s experience for years and, according to Digital Trends, is one of its winning features against Netflix and other competitors.

Feeling the threat of ever more and ever greater competition, Netflix announced in spring 2021 its foray into interactivity, N+, which would enable users to get exclusive content based on the individual preferences. As of August 2022, the application still hasn’t launched.

Netflix is throwing everything it can at the wall to appease investors and bring back the good times. Deeper forays into consumer products, licensing, theme park rides…it is all on the table. The entertainment business never stands still and nor will those who succeed. With Disney now the leader in global subscriptions, it is Netflix who is playing catch-up