Ads are coming to Netflix and Disney+. How will it affect the industry?

Following poor first quarter performance by Netflix, after which the streaming king announced it lost subscribers for the first time in over a decade, the company, long committed to an ads-free viewing experience, was suddenly singing a different tune.

Netflix CEO Reed Hastings stated in the company’s first quarter earnings call that “allowing consumers who would like to have a lower price and are advertising-tolerant get what they want” was “something we’re looking at now.”

Just weeks later, Netflix told its employees that an ads tier could come as soon as the end of the year.

Similarly, Disney signaled in March it would be introducing an ad-supported subscription offering to Disney+ beginning in the US in late 2022, with plans to expand internationally in 2023.

In advance of its upfronts presentation in late May, Disney announced details of its ads tier: it would be limited to just four minutes of ads per hour, and additional restrictions on the types of ads it would run, particularly on shows and films meant for young audiences.

Introducing advertisements to such major streaming platforms for the first time is a significant development. While ad-supported services like Hulu, Amazon’s Freevee (formerly IMDb TV), and, as of June 2021, HBO Max, have existed for some time, Netflix and Disney+ introducing an ad tier will grant marketers access to a slice of Netflix and Disney+’s combined 300 million+ subscribers.

‘Just the last shoe to drop’

But introducing an ad tier comes with questions, and adland has been speculating for months over what could be in store. What will ads look like on the platform? Will shows and movies be affected by ad breaks? Will ads be frontloaded and backloaded? How will users react?

“It’s hard not to be excited given the subscriber base Netflix has,” says Andrew Sandoval, VP of biddable media at digital marketing agency Croud. “We haven’t seen a platform of this size flip like this.”

Sandoval has tempered his expectations for Netflix’s ad tier as he awaits more information, and he’s aware that the offering on day one is likely to both be sold out immediately and be subject to changes over time as Netflix tests and learns.

He is also confident that, though Netflix haemorrhaged subscribers in the first quarter (in part due to Russia’s invasion of Ukraine), the creation of an ad tier is unlikely to significantly upset existing customers.

“I think people are more upset about Netflix canceling shows than introducing an ad tier. […] This is just the last shoe to drop.”

Sandoval believes that content strategy is king, as all it takes is for Netflix to release the “next Squid Game” for consumers to flock to the platform to watch. Indeed, Netflix officially announced season two of Squid Game earlier this week.

Therefore, any strategy to incorporate ads needs to be done in a way that does not affect the content on offer – a tricky proposition given that prestige TV shows like Ozark and Stranger Things were not written or designed around ad breaks.

What should Netflix do to create an attractive offering?

While speculation about what Netflix could do could go on ad nauseum, Sandoval and Eric Levin, chief content & innovation officer for Publicis Media US, have some thoughts on what Netflix should do to win marketers – and consumers – over.

Namely, Levin thinks Netflix should be using the opportunity to allow for more creative forms of advertising, explaining: “We’ve barely scratched the surface on the tech that allows us to actively participate in advertising – voice touch, QR codes, VR/AR, etc. – all of it can and should be looked at as a way ‘in’.”

“Interactive ads would also be very interesting”, agrees Sandoval.

Levin continues: “Netflix is known for innovation, and will likely want to experiment so as not to interrupt. If you look at how they’ve done promotions in the past, they’ve always pushed the envelope – I feel the same will be done here. I have to believe there are teams and agencies experimenting with all of this now.”

He adds: “We’ve seen previously how brands have created a ‘show within a show’ – ways to extend character arcs, introduce new plotlines, etc. all as part of a larger brand campaign. It’d be interesting to see that done here with more consistency.”

For Sandoval’s part, he notes that one thing Netflix has going for it is a high level of AI and machine learning that could help decide programmatically what parts of shows may be particularly good ad spots.

“The automated tools are going to let them test a lot of things,” he says.

Rather than running the same ads over and over, interrupting content and using a countdown timer to signal ad length, Netflix should be looking to create a more consumer-friendly ad experience. But as Sandoval mentions, introducing ads is something of a wicked problem for streamers, as viewers commonly binge multiple episodes of shows, meaning there is no perfect opportune time to interrupt viewing.

Sandoval also notes that how Netflix and Disney+ measure the effectiveness of ads on their platforms is going to be a very big topic for ad buyers. If they don’t provide measurements, as well as granular audience targeting – including allowing media buyers to target by shows and transact on tentpole offerings – it would “devalue their ad offering,” he says.

He adds that “one partner it seems [Netflix has] been talking to is the The Trade Desk”, a development Sandoval described as “very exciting” given that it would allow advertisers to “activate not just data from Netflix, but from every third party.”

Another point worth Netflix and Disney’s consideration is whether the streaming services would be open to letting other content providers advertise on their platforms. Whereas HBO Max has generally refused to do so, Sandoval muses that Netflix would be wise to, for example, allow Paramount (which already currently has licensing deals with Netflix despite now having its own streaming service, Paramount+) to air commercials promoting its new film Top Gun: Maverick for users who stream the original Top Gun on Netflix.

“Why wouldn’t you take your competitors’ money if you can?”

‘It isn’t always easy, but when done right, it’s magic’

But whatever Netflix tests, tries, and implements, Levin notes that it will be a long process, and one that agencies and brands should play a role in.

“In order for any of this to happen, there needs to be a ‘reset’ of sorts. Muscle memory is our biggest enemy – meaning, we have to stop looking at a 30 or a 60 second ad as useful in these spaces. It’s lazy.

“It’s a whole new landscape to play in. My hope is that the streamers invite agencies and brands to be a part of the process. To work together to find a balance between brand and creative needs. It isn’t always easy, but when done right, it’s magic.”

Ultimately, Sandoval sees the goal for SVOD platforms to allow for ads to be dynamically inserted into media that wasn’t originally created for ads. And he believes that in the end, every streaming platform will welcome the financial support that comes with it.

“In the very long game, it’s all going to go ad supported.”