Was it an instant reaction to a disappointing set of numbers or an expression of a carefully thought out plan that was already in the pipeline? Only Netflix can answer that, but what we do know is that the company is considering introducing an advertising-funded service to provide an alternative to its existing subscription model. If the plan goes ahead, it will represent a major recalibration for Netflix but what will it mean for advertisers?

Netflix CEO, Reed Hastings flagged up the possible introduction of an ad-funded service during a call to investors in April. It was, he said, a matter of consumer choice. Rather than paying a full subscription, users of the streaming service would be given the option to pay a smaller monthly fee, with the missing revenues being replaced by advertising sales. In theory at least, this should attract consumers who are currently deterred by the cost of a full subscription. There are of course precedents for this kind of approach. In the audio arena, Spotify has done well out of a model that provides both an ad-funded free service and a subscriber model that strips away the advertising and also offers benefits, such as the ability to store songs on the user's own devices.

But the timing announcement can't really be separated from the circumstances. Hastings was speaking to investors at a time when the company's figures for the first three months of 2022 showed a fall in subscribers - 200,000, to be precise - for the first time ever. More worryingly for its investors, Netflix predicted it would lose 2 million more subscribers by the end of June 2022.

Streaming Fatigue
One fundamental problem is that consumers may be suffering from subscription fatigue. To keep up with all the latest shows on Amazon, Apple, Disney, Netflix and the restcosts quite a lot of money. Thus, advertising funded VOD may be the only way to retain cash-strapped consumers as the cost of living soars or indeed bring new people on board. "The number of pure-play subscriptions to VOD platforms has risen substantially over the last few years," says Daniel Tjondronegoro, CEO of ad-tech company, Beatgrid. "I think people are starting to get too many subscriptions, and it's starting to get too costly for many households."

There may also be a retreat - on the part of the consumers - from their Covid-induced media consumption habits. Fara Darvill is Growth Director at branding agency, Design by Structure. As she sees it, the positive impact of the pandemic on video on demand subscriptions may be receding. "Following the perfect storm created by the pandemic, which created and captured entertainment-hungry audiences, Netflix's subscriptions skyrocketed. However, this was artificial acceleration and growth which was bound to slow and slack," she says.

Which is not to say that the age of subscription streaming is coming to an end. Between them, the likes of Netflix, Apple, Disney and Amazon Prime are making must-see television and film - content, which is not only appreciated by subscribers but also widely reviewed and garlanded with Oscar and Emmy awards. Fear of missing out remains a major pull factor. It's just that not everyone can afford it. But the market is changing. In addition to subscription services, we are also seeing the rise of standalone ad-funded (AVOD) services across Europe and the US. And according to research by Insider Intelligence, 58% of video streaming users will be accessing AVOD by the end of 2022.That's inthe US, but the trend is likely to be repeated elsewhere.

A Smart Move
So, against this backdrop, offering an ad-funded service to grow the reach of the service seems like a smart move."The large longtail of addressable audiences is the ones that don't want to pay for another subscription," says Tjondronegoro. "Netflix can start to reach and monetize the largest audience." That's undoubtedly an appealing prospect for advertisers. Depending on how Netflix decides to roll out its ad-funded content, they will potentially haveaccess to a huge global audience who are engaged with much-loved shows.

Jacob Weithorn is Associate Director of the Center for Video Excellence at Kepler, a data-driven marketing agency with a growing presence in video advertising in general and connected TV. As he stresses, advertisers and agencies are still waiting to find out more about how ad-funded content will work in practice. "Netflix is massive and this is of immediate interest to those with an interest in connected TV activation," he says. "But we don't know as yet how Netflix will adopt the advertising model." For instance, as yet, it's not known what the company's back office infrastructure will look like, whether ads will be sold programmatically, how much customer information will be shared with brands and what the measurement capabilities will be.

There is perhaps a danger that Netflix will alienate its customersby introducing ads in a space that has been up to now associated with uninterrupted viewing. "Ad free content was part of the appeal from the start," says Weithorn. "They will have to put the user experience front and centre." That said, the company does seem to be putting the emphasis on consumer choice. That would mean those who cherish Netflix as it is now will go on paying a premium subscription while others will be happy to watch ads in return for a cheaper option.

And as Fara Darvill points out, Netflix wouldn't necessarily be an outlier. "Its peers, Disney+ and HBO Max are and have launched ad-supported tiers to their services to add a competitive edge and drive subscribers," she says. The same is true of Amazon Prime which has included an ad-funded channel within its walled gardenof streaming services. And as Weithorn sees it, Netflix can learn from other connected TV platforms. As the dominant VOD provider, it is then in a strong position to create a user experience that will work for its users.

The Generation Game
Advertising on Netflix would offer more than a large and global community of users. It's also a young audience. Research carried out by Civic Science suggests that the core audience are General Z and Millennials.In addition, this is an audience that can be targeted more effectively than would be the case through traditional "linear" TV. Netflix is delivered via phones, tablets and smart TVs, all of which supply a certain amount of data and login information might also be available to advertisers. In practice, that means brands should be able to target ads on consumers based on location, device,time of day, and the genres of programmes being watched and demographics.

"Innovative tech like contextual matching can be conducted on a granular level, so Netflix can provide a highly customised service that makes the customer feel individually valued and catered for - all while paying a lower subscription price," says Kai Henniges, CEO & Co-Founder at Video Intelligence, an agency specialising in creating contextual video. The targeting, particularly through smart television may not be perfect. For one thing, a lot of Netflix users share passwords, so the login data may not be relevant. Interestingly, the company has signalled that it wants to take a tougher line on the sharing of passwords.

And even if users are opting in to advertising Henniges warns that Netflix will have to take care to protect its values and brand. "They will need to ensure factors such as ad frequency, brand safety, and relevance are considered. It's also crucial Netflix sets and maintains standards as to the quality and aesthetics of their adverts so they enrich, not detract from, the user experience," he says. Weithorn agrees, saying the key is to align ads to the interests of individual users. There is scope, he says, to experiment with different ad formats. For instance; "There could be an emphasis on commerce and shoppable ads."

If Netflix does indeed embrace advertising, there will be opportunities for advertisers to address hard-to-reach audiences, with targeting based on demographics and content. There may even be scope for new kinds of content, created specifically for streaming. There is huge potential, but a lot depends on how Netflix itself will choose to implement its plan.