Netflix may introduce an ad-supported tier.
That's surprising because Reed Hastings, co-founder and co-CEO of Netflix, has been publicly against introducing ads on the streaming platform for many years.
Just two years ago, he said he wanted Netflix to be a “safe respite where you can explore, get stimulated, have fun, enjoy, relax—and have none of the controversy around exploiting users with advertising.”
But times have changed.
Netflix lost 200,000 subscribers last quarter (the first time they've ever had negative subscription growth), and expects to lose an additional two million subscribers next quarter... and the company understands it needs to find new ways to generate revenue.
Accepting money from advertisers eager to access the company's 214 million subscribers seems like low-hanging fruit from a revenue perspective, doesn't it?
Six years ago, I published an open letter to Reed Hastings, right after Netflix informed me that the cost of my service was going to increase... to a whopping $9.99 a month.
(Given that was the first of many price hikes to come and I currently pay $20.99 + HST every month, I'm calling those "the good old days" as it relates to the cost of the service.)
In my letter, I wrote that I wasn't at all upset about the increase because I saw tremendous value in the service, but realized not everybody would be as agreeable to paying more.
And because I wanted the service to continue to thrive, I offered eight suggestions "on how to create even more brand love from your subscribers and acquire new customers."
"Introduce Ads" was my eighth recommendation, which I realize may seem counter-intuitive if the goal is to offer a better experience for viewers.
But I didn't just suggest the company "Introduce Ads".
I wrote they should, "Introduce Ads (But be smart about it!)".
Specifically, I suggested Netflix should:
1) Restrict the type of ads (and advertisers) allowed on the service, instead of letting everybody with a budget air whatever commercial they wanted;
2) Ensure "customer first targeting" was deployed, where Netflix would use what it knows about me (based on what I watch) to show me ads I'd actually want to see;
3) Limit the number of ads shown before every television episode or movie watched.
I suggested that by doing so, Netflix could offer a different and better ad experience that consumers would enjoy, thereby using advertising to enhance (rather than detract) from the customer experience.
Considering how much the media landscape has changed over the past six years, I think all eight of my recommendations have held up well. (They've essentially implemented #4 and #6, but I suspect the other recommendations would still be popular today.)
But the recommendation on the best way to introduce advertising to the streaming service seems especially worth revisiting.
If you want to read my original post, I've pasted it below.
(It's identical to what I published six years ago except for a few minor grammar changes I made after Grammarly caught them when I revisited the text.)
I'm a long-time Canadian Netflix subscriber and a huge fan of the service.
Last week I received the email I'd been expecting for two years. If you don't know the one I'm talking about, it began as follows:
Dear David: When we raised prices for new Netflix members in 2014, we kept your price the same for two years. Your special pricing is now ending and your new price will be $9.99 per month.
Was I angry with you? Not in the slightest.
In fact, you may be happy to know that instead of deciding to cancel my service, I upgraded my plan to the $11.99 / month option. (We likely won't ever use four screens at once, but I thought access to Ultra HD content where available might be a nice compliment to my new TV. Plus, I think you deserve the extra $2.)
How do I explain this extremely unusual reaction to a 25% price increase? Easy: I love Netflix! In fact, it's the only product or service I currently buy that could double its prices and still keep me as a happy customer because I see Netflix as tremendous overall value. Heck, the fact that I can place my kids in front of my big screen for almost two hours every Saturday morning and give myself some peace and quiet is worth far more than $12 a month!
But I realize not everyone feels that same way, and ultimately that's going to be a challenge for your company. I'm personally happy to pay a reasonable amount to watch great content in the comfort of my home, and your company is becoming very good at acquiring and creating great content. ("House of Cards"? "Orange Is the New Black"? Daredevil? Jessica Jones? Those aren't "great" series, they are exceptional!) But not everybody feels the same way; going to the movie theatre gives you faster access to newer films and a big-screen experience, and pirating content is cheaper.
Because I want Netflix to be around for a long, long time, I'd like to humbly offer eight suggestions on how to create even more brand love from your subscribers and acquire new customers. (#8 is a doozy, but hear me out, okay?)
1) Let me Share-a-Show with my friends. My wife and I just finished binge-watching "Luther". I enjoyed the series, and I want my friends to enjoy it too! Sure, I could tell them about it next time I see them and we happen to be discussing great shows... but that's "later", and I'm excited about the show right now!
Here's an idea: let me send my friends a link to watch Episode 1 of a favourite show right from within Netflix, regardless of whether or not they are current Netflix subscribers! The mechanics would be fairly straightforward: you would have a "share" button right underneath "rate this title", I click on the button, and then I'm given the opportunity to share this episode with friends by entering their email addresses. When a friend gets the email and clicks on the link, they are taken to the site... if they are already a Netflix subscriber, the site recognizes that and they are taken to the "start page" for the show. And if they're not? Then they get taken to a special screen that invites them to watch the show for free, just by entering their email address. And now you have their email address, and can send a follow-up message the next day with a customized offer to subscribe to Netflix: "David thought you'd like Luther... was he right? If so, why not watch the rest? Try Netflix free for one month!"
Of course, this "hook" approach would only work for television series; nobody would care about being sent the first 15 minutes of a film. But my wife and I are now looking for a new series to enjoy together, and if a friend were to recommend a series to me by providing a link to easily watch the first episode, you bet I would watch it. And if I liked it, I'd want more... and if I wasn't a current subscriber, all of a sudden $9.99 a month is less than the cost of buying three of those episodes on iTunes.
2. Help me build a network of Trusted Entertainment Advisors Your "star system" does a pretty good job of predicting what I'm going to like on your service. But I'd like Netflix to let me create a group consisting of friends I trusted to provide me with solid content recommendations; an "entertainment board of directors" if you will. I could choose any number of people whose tastes were aligned to mine, and then (assuming they all agreed), their viewing habits and ratings would automatically be factored into the content recommended for me: an easy way to crowd-source recommendations on what to watch next. Speaking of which...
3. Make Netflix Social. Nobody has ever accused me of being passionate about Health & Wellness, but my physical activity increased noticeably soon after I purchased a FitBit. It's not that I was inherently any healthier, it's that my competitive nature kicked in: I would take the stairs instead of the elevator or walk short distances instead of taking an Uber because I hated when my FitBit friends had higher step counts than I did! Take a lesson from FitBit: make Netflix more social.
You already know that I'm a "House of Cards" fan, because you know I've watched every episode. So why not let me earn an "F.U." fan badge when I watch the entire next season just a few days after it's released? Better yet, why not allow me to issue a fun "binge challenge" to my trusted entertainment advisors to see who could get through the latest season the fastest? Give me a personal page on a section of your website where I could proudly display all the badges I collect and award special "money-can't-buy" prizes for your top badge collectors in each country. (What kind of prizes? How about a walk-on role in the next season of Daredevil? In developing your own content, you are in a unique position to allow your biggest fans to become a part of the experience!)
Technology enables the creation of communities around passion points, and film and television are both powerful passion points. Use that to your advantage.
4. Standardize the Interface. I'm sure you have a good reason why the look and feel of my Netflix is different depending on whether I'm watching on my computer, my bedroom Apple TV (2nd Gen), my living room Apple TV (3rd Gen) or my office LG Smart TV... but if you do, I don't understand it.
Having a consistent brand is Marketing 101. The Netflix interface is an important and valuable part of your overall brand, and your service is diminished when certain devices offer a better experience than others. As a consumer, I really don't want to have to remember what features and options are available on my different devices... I just want a single Netflix to know and love.
5. Parental Content Block There's no accounting for taste. I have no problem letting my kids watch superhero cartoons that other parents would consider too violent for their children but absolutely refuse to let my kids watch that whiny Caillou. (Yes, I'd rather they learn to fight than whine. Judge me if you must.) Your kids' content is pretty diverse, and in that diversity, there are some shows that I simply don't want my children watching, for whatever reason. Let me block shows from appearing as options on the menu.
You see, my kids are now old enough to head downstairs on their own when they wake up and turn on the TV. And although I've told my five-year-old daughter I don't want her to watch "Barbie: Life in the Dreamhouse" (because it's 2016, and I'd prefer she watch "Barbie: Life as CEO"), it would be great if you could help me enforce that by letting me remove the show as an option on my kids' profile altogether. A little bit of extra control for us parents would go a long way in making us comfortable with letting our kids spend more independent time with your service during their allocated screen time.
6. Global Content Rights Your recent crackdown on VPN users was equally effective and annoying. I completely understand why different counties have different content libraries, and how difficult it will be to make global rights the new standard. But frankly, that shouldn't be my problem. And you're now a large enough content player to help redefine the rules. I choose to pay for access to content despite being technically savvy enough to easily pirate it should I choose to do so. In return, you have a duty to use your growing influence in the entertainment world to negotiate intellectual property rights on a global basis. Enough said.
7. Introduce "Netflix Zoom" Okay, it doesn't have to be called "Netflix Zoom". But one of the biggest knocks against Netflix is that it only has "old content", and that it takes a long time for a film to make its way to your TV screen. So why not make a premium Netflix subscription available where, for a significant price premium, you would get access to the movies on the day they were released on Blu-Ray? I'm not an expert in media economics, but I have enough experience with packaged goods and retail to make a few basic cost assumptions. Take a Blu-Ray of a film just out of theatres, which can be bought at a retailer for an average of $25. The retailer needs to make some money, so let's say they purchased it from the distributor at an average cost of $15. The distributor has production, packaging, shipping, promotion, and a host of other costs, so let's say they actually make an average of $7 in profit from that Blu-Ray sale. Not a lot of money, really. Now let's say you launched a premium service that charged your consumers $30/month (instead of $12) but included "day of release" access to films? (Only subscribers to the "Netflix Zoom" service would have the option of watching these films, which would appear as a separate content category just like "Action Films" or "Because you watched Die Hard".) Using my simple math model, you'd have $18 per subscriber to negotiate with the major film companies for "earlier than usual" rights to the content they'll eventually sell to you anyway. That's at least worth a test, isn't it?
8. Introduce Ads (But be smart about it!) Yes, as counter-intuitive as it may sound at first, I absolutely believe you should introduce ads to the Netflix service. These ads would mean more revenue for you, which can then be used to buy (and create) more content for me. (The only other way for you to generate additional revenue is to raise my monthly fee, and even I have a limit to how much I'd pay for your service.) But your unique platform gives you the opportunity to be really smart about how you do this, in a way that won't upset (and might even delight) your customers.
Type of Ads (and Advertisers) Allowed: This is where you really have the opportunity to change the advertising landscape. Simply refuse to just give any advertiser with a wallet access to your consumers. Instead, put together a smart team of experienced marketers and content developers who can review each ad submitted and decide if it's worthy of being shown. Be audacious enough to proclaim that only remarkable ads will be shown on Netflix. What's a "remarkable ad"? For these purposes, I'd define it as an interesting or entertaining piece of content that your consumers likely won't mind watching; extraordinary ads like P&G's recent "Thank You, Mom" tear-jerker or Nike's unbelievable "Write the Future" spot from a few years back. You could also define a remarkable ad as a hyper-contextually-relevant piece, such as an ad for a Leap Motion Controller right before someone is about to watch "Minority Report", for instance. Are "remarkable ads" the same as "effective ads"? Of course not. But that's for the client and the agency to figure out. For Netflix, the key is to clearly communicate that you're not just another media platform desperate for ad dollars. You are a valuable and respected content distributor that has strategically decided to make a very limited number of advertising spots available, but only to special advertisers who care enough about their consumers to make great content. Smart advertisers (and their agencies) will quickly recognize Netflix represents virgin ad territory, and will likely start making "Netflix ads" a consideration at the brief stage or a project, just like many do with TrueView and Facebook ads now.
Customer-First Targeting: You already ask your subscribers to create profiles, and you already know what each profile chooses to watch. Use that information to build out targeted interest-based segments. I'm almost 39 years old but have a... um... "strong affinity" for comic book shows. So target me based not just on my age, but also on my interests. The more content I watch (and rate), the more you can accurately hypothesize about what I might like, and the more you can use that knowledge to serve me ONLY ads you think I'll enjoy. (As opposed to ads that advertisers want to force upon me.) This is key: I'm your customer, not the advertiser. Show me great commercial content, and show it to me only if you think I'll like it. If you think I won't? "So sorry, Madame Advertiser, but you'll need to reach this guy on another platform." And what happens if you don't have an appropriate ad to show your customer before the content they want to consume? Then don't show them anything at all, just like what happens today.
Number of Ads Allowed: For television shows, limit the number of ads shown to one 15-second unskippable ad for every 30-minutes of viewing, played right before the show begins. For movies, customers would have to watch a maximum of two 30-second ads before the film begins. Compared to what you have to sit through while watching television or before you watch a film at the theatre, that's nothing for people to complain about. And these limits have the added benefit of creating inventory scarcity that will allow you to charge premium cost-per-views.
Cost per View: As an ex-Googler, I'm going to avoid a world of potential trouble for myself and not give you an exact number as to what you might charge for this "remarkable ad" system. But as a marketer very familiar with both the value of reaching targeted audiences and an advertiser's willingness to pay for that privilege, let me assure you that if you do everything I've outlined above, you'll absolutely be able to command an excellent cost-per-view much higher than anyone else can justify today.
Reed, I'm obviously a huge Netflix fan, and I have been for years. So I offer you these seven suggestions only in the hopes that Netflix will continue to evolve, grow, and prosper. Of course, if you feel like you want to chat further, I'll do my best to make myself available. (Seriously, next time you're in the Toronto area, let's have dinner and a robust discussion! You don't need to go so far as to open up a Canadian office and hire me, but that would be pretty great too.)
With respect and admiration, David Pullara, Marketer & Fan of Great Content
* I hope you don't mind the first-name basis, but your company is such a big part of my family's life that I feel like we're old friends.