Netflix co-CEO Reed Hastings finally acknowledged what most people outside of the company have been saying for years: In order to keep growing, the company will need to incorporate ads.
The executive offered his view on the subject Tuesday after Chief Product Officer Greg Peters addressed the spread in pricing among different territories and subscription plans with a stunning declaration. The execs were speaking on the company’s first-quarter earnings interview, which was posted to YouTube this evening, per quarterly custom.
“One way to increase the price spread is advertising on low-end plans and to have lower prices with advertising,” he said. “Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription. But as much as I’m a fan of that, I’m a bigger fan of consumer choice. Allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So, that’s something we’re looking at now, we’re trying to figure out over the next year or two. Think of us as quite open to offering even lower prices with advertising as a consumer choice.”
No specific outline was offered for when or how advertising would be phased in. But the comments took on extra urgency given their timing. Earlier today, Netflix reported not only a subscriber miss, but its first decline in global subscribers since 2011. In part, it blamed competition, voicing concerns about the crowded marketplace in a more full-throated way than they had before. With 221.6 million subscribers, Netflix continues to lead the field, but its growth has moderated significantly and it has fewer levers to pull. A recent price increase in the US and Canada has made Netflix the most expensive streaming player on the market, and that status could make it vulnerable to cheaper rivals.
Netflix for years has waved away the mere notion that it would consider rolling out an ad-supported tier. Most of its US competitors, notably newcomers like HBO Max, Disney+ and Peacock, have all been in various stages of adding sponsored messages to lower-priced plans. In the past, Netflix — and Hastings in particular — have cited a host of concerns, including privacy as well as the intricacies of integrating outside brand messages into the company’s well-honed interface.
Asked during the call about the task of weaving in advertising to the company’s strategy, Hastings admitted it is “not a short-term fix, because once you start offering a lower-priced plan with ads as an options, some consumers take it. And we’ve got a big installed base that probably are quite happy where they are. It would phase in over a couple of years in terms of being material volume.”
Technological evolution also has played a role in the company’s shift. “The online ad market has advanced, and now you don’t have to incorporate all the information about people that you used to. So, we can be a straight publisher and have other people do all of the fancy ad matching and integrate all the data about people. So, we can stay out of that and really be focused on our members, creating that great experience, getting monetized in a first-class way by a range of companies who offer that service.”
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As to whether the company would need to test it in a few markets or for a subset of subscribers, Hastings said the verdict is in. Hulu has scaled its ad business over 15 years, adding an ad-free tier five years ago, and Disney+ and HBO Max have gone from pure subscription to having ads. “I don’t think we have a lot of doubt that it works,” he said. “I’m sure we’ll just get in and figure it out as opposed to testing it and maybe get in or not. …I think we’ll really get in.” Ad-free options will remain in place, he emphasized.
The full-throated endorsement of advertising came just weeks after a much more oblique sentiment on the subject from CFO Spencer Neumann. Asked at an investor conference earlier this year about the notion of ads, Neuman came the closest to Hastings’ comments, but still left it ambiguous. “Never say never,” he said.