Netflix is still reeling from its unexpected decline in Q1 subscribers — and the major dip is causing co-CEO Reed Hastings to rethink his anti-advertising approach following years of resistance.
"Those who have followed Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscription," Hastings said during the company's earnings call last week.
"But as much as I am a fan of that, I am a bigger fan of consumer choice, and allowing consumers who would like to have a lower price and are advertising-tolerant to get what they want makes a lot of sense," he continued, adding that the streamer will look to add a lower-priced, ad-supported tier "over the next year or two."
The streaming giant's thought reversal comes as inflation remains high, consumers cut costs and competition intensifies, although advertising executives see a wave of exciting growth opportunities as a result.
"It's massive — not only because of what it means for Netflix, but also because of the impact that it will have on the entire TV ecosystem. It's going to force a lot of change," said Ash Gangwar, GM of TV partnerships at the $32 billion digital ad-buying company The Trade Desk (TTD).
"There is subscription fatigue at this point," Gangwar noted. He cited the plethora of consumer choices, with many platforms offering their own own ad-supported tiers to thwart subscriber cool downs and lure paying users.
HBO Max (WBD), for example, launched its ad-supported offering last summer whereas Disney+ (DIS) announced that it would introduce a lower-price advertising tier this year.
Hulu, owned by Disney, has been running ads since 2007. The service reached nearly half of all connected TV households in the U.S. last year, according to Comscore.
Gangwar called out the premium nature of both Disney and HBO, and how those platforms have helped soften sentiment around the ad-supported experience.
Even Netflix's Hastings referenced his competitors during the company's earnings call, saying, "It’s pretty clear that it’s working for Hulu. Disney’s doing it. HBO did it. I don’t think we have a lot of doubt that it works. All those companies have figured it out. I’m sure we’ll just get in and figure it out as opposed to just test it and maybe do it or not do it."
Ad-supported video-on-demand (AVOD) "has proven itself to a point that it both makes economical sense and is also accepted by consumers," Gangwar said, explaining that Netflix likely will "slow down the subscription losses and start growing again pretty fast" due to the new offering.
He added, "It gives consumers choice. Choice is always good."
According to The Trade Desk's latest Future of TV report, which surveyed 150 TV advertising planning and buying decision makers with annual ad budgets of $5+ million, more U.S. viewers report watching streaming content with ads (44%) than without (33%).
The survey added that nearly two-thirds of U.S. viewers (64%) don’t want to spend more than $30 in total per month on streaming services, making free or lower-cost ad-supported services more attractive to consumers.
Looking ahead, Gangwar noted that Netflix is in a positive position as it does not rely on advertising in the same ways as traditional media players, which are beholden to a particular legacy structure, like the 30-second ad spot.
"Netflix has a flattened slate," the executive revealed, underscoring that the platform has the power to experiment and change the entire ad ecosystem for the better.
"Netflix can say, 'How do I create the best consumer experience?' If that's a 30 second ad, great. But if it's not, they can be creative and let data drive their choices," Gangwar explained, adding that he sees a more curated experience in which users are shown certain ads depending on their profile and preferences.
"That's the table stakes. You have to not only cater the ad to the advertiser, but you also have to cater it to the consumer based on their interests," he continued.
Data has been an increasingly important element to streamers that are looking to deepen their connections with subscribers, thus making an interactive, ad-supported experience a win-win in terms of customer retention and information.
"The content experience and the ad experience can feed on each other," Gangwar said, predicting that users will see more interactive ads and experimentation within the space overall.
"Netflix will force all of the streaming services to make things better than they are today," he concluded.
Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193
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