How Netflix can build its ad business

Now that Netflix is getting into the ad business, the streaming giant has to figure out how to incorporate the commercial breaks. A logical first step would be to partner with ad tech platforms like The Trade Desk, according to ad industry watchers. On Tuesday, Netflix executives revealed that the platform would finally start to sell ads, within one to two years. Netflix had just released its first-quarter earnings report that showed a drop of 200,000 subscribers and exposed other challenges to the business, which made it necessary to at least test ads. “Think of us as quite open to offering even lower prices with advertising,” Netflix co-CEO Reed Hastings said Tuesday, after announcing earnings. The next step for Netflix is to grow an ad infrastructure, plugging its connected TV and mobile apps into the programmatic online ad marketplace. “They have no choice but to partner,” said Andre Swanston, senior VP of the media and entertainment vertical at TransUnion, the consumer data technology platform. “They couldn’t move fast enough to build out their entire capability.” Netflix’s ad business has all of a sudden become one of the most talked-about properties among ad agencies and connected TV tech companies, which would all like a piece. “Netflix has some of the most coveted connected TV inventory in the world right now,” said Adam Epstein, co-president of Perpetua, an ad tech software firm. The deadline for the 2022 Small Agency Awards is Wednesday, April 27. Submit your entry at AdAge.com/SAA2022. Swanston and Epstein said that it would make sense for Netflix to choose a partner like The Trade Desk, which runs a demand-side platform for brands to deliver ads to connected TVs and across the web. Netflix could also theoretically work with Google, Amazon or Roku, or a sell-side platform like Magnite, Epstein said. But The Trade Desk has developed a reputation for partnering with media companies and publishers on ad tech, including its recent tie-up with Walmart to build an ad platform designed for the retail giant. Disney also recently announced that it was “exploring a path to activation with The Trade Desk,” as it rolls out an ad and data platform for connected TV. “Netflix has been really good at licensing and producing content that resonates specifically in different geographies,” Swanston said. “They should use that same mindset to customize these ad models.” Historically, Netflix has been averse to advertising, touting “no ad interruptions: Enjoy all of the entertainment with none of the interruptions,” according to its marketing language on app stores. But the ad-supported video on demand market has become too big to ignore, and viewers have shown some willingness to pay lower prices for services that have ads, like on Hulu. Meanwhile. Netflix’s rivals are starting to mint money through digital advertising on connected TVs, including Disney, which owns Hulu, ViacomCBS, NBCUniversal, WarnerMedia and others. The connected TV U.S. ad market will grow to $19.1 billion this year from $9 billion in 2020, according to eMarketer. Meanwhile, TV ad spending is expected to hit its peak this year at $68.4 billion in the U.S., before starting to decline in the coming years, eMarketer said. At the same time, Netflix is having a hard time retaining subscribers, dropping 200,000 accounts last quarter to 221.6 million subscribers. The company also forecast it could lose another 2 million subscribers this quarter, and it is dealing with the phenomenon of password-sharing, which affects its ability to monetize the service. That’s where ads come in: It’s unclear what lower price Netflix would have to set to entice enough consumers to opt into the ad version, but there are signs that consumers are willing to pay less to endure ads. A recent Kantar report said that one of the biggest reasons people cancel subscription services is because of the price. Of Netflix users surveyed, 26% cancelled to save money, Kantar found. The price wasn’t the only reason, though. Viewers also are making subscription decisions based on the content, and Netflix has greater competition from Disney, ViacomCBS, Amazon and others. Netflix could turn its fortunes around with advertising because brands have been interested in reaching its audiences for years. And Netflix is sitting on a mountain of data that could help target ads. “Netflix could partner with someone from an identity resolution or data standpoint,” Swanston said. “Netflix already has a trove of first-party data that can deliver a variety of audience segments for advertisers, and relevance for consumers,” said Adam Helfgott, CEO at MadHive, the programmatic ad tech firm. “In order to sell that inventory in context with TV overall for advertiser objectives, they will need to integrate into the ecosystem and partner with DSPs, SSPs, and infrastructure providers." TV Upfronts and Newfronts 2022 calendar On Tuesday, Hastings mentioned how Netflix could proceed into advertising through partnerships: “We can be a straight publisher and have other people do all of the fancy ad matching, and integrate all the data about people,” Hastings said. Advertisers see another potential avenue to explore with Netflix, beyond inserting ads into shows; they also want to integrate with the programs. That’s an area Netflix has been less accommodating than other platforms, according to Swap Patel, executive director of media at ad agency McKinney. When brands get mentioned in Netflix shows, like Eggo waffles in “Stranger Things,” it can be a powerful marketing opportunity. Last year, Duolingo, the translation app, capitalized on an appearance in “Emily in Paris.” “Netflix is not the same as your typical advertising entities,” Patel said. “As they grow this offering, they’ll be figuring some version of that [brand integration] out, to communicate the vastness of the Netflix audience, the value, and the mechanics of how to reach them.” Brad Dixon, co-founder and executive creative director of Special Operations Studios, the creative agency, agreed that Netflix could offer combination of targeted ads and brand integrations. Netflix already has its own ecommerce store that sells products linked to its shows, some through collaborations with brands like Nike and Balmain. “Show integrations plus native ad units, or any mix of the two, would be cool from a creative perspective,” Dixon said.

How Netflix can build its ad business

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