Netflix is new to the ad-supported subscription model, having just launched November 3, but they have missed viewership targets and are offering refunds to advertisers. According to Digiday, Netflix made viewership guarantees to advertisers, and the streaming subscription service has failed to hit their mark with the new AVOD tier. Netflix is giving refunds to advertisers for ads that have not yet run.
Digiday reports that Netflix’s deal with advertising agencies is that they’d pay on delivery, so advertisers only pay for the actual viewers they reached. Any unspent balances would be returned to agencies at the end of each quarter. This differs from TV advertising where an advertiser pays a network and, if they don’t meet viewership targets, the ad dollars stay on the books until they reach the expected goal.
One agency executive said, “They can’t deliver. They don’t have enough inventory to deliver. So they’re literally giving the money back,” reports Digiday.
In this case, the advertisers who received refunds were those who wanted their ads served up during the fourth quarter when consumer shopping is at its peak. Not everyone requested a refund, however. Some advertisers were willing to push their advertising dollars to the first quarter of 2023. By that time, Netflix’s ad-supported subscription tier will have had a chance to grow, and viewership may increase.
So, what happened? Was this a major failure to launch on Netflix’s part? Some advertising executives speculate that Netflix dramatically accelerated its timetable for developing an ad-supported subscription tier to keep up with the competition. Disney+, for example, just launched their ad-supported subscription tier on December 8.
When Netflix originally discussed the idea during their first quarter earnings call, chairman and co-CEO of Netflix Reed Hastings said it was an idea they would develop in the “next year or two.”
“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,” Hastings said. “…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 it out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”
Netflix stock
Investors are not impressed by this latest development. On December 14, Netflix’s stock was valued at $317.83 per share. As of 7:12 a.m. Eastern yesterday, Netflix stock was $288.19 per share, a difference of $29.64, or roughly 9.3%.
Insider Take
Netflix has taken a beating this year with subscriber losses, layoffs and sometimes falling short of expectations. Our opinion may not be a popular one, but we believe investors and others are overreacting. Netflix is playing a long game, and they have sustained their company successfully for 25 years. They were a streaming giant long before anyone else came along, and they have been at the forefront of their industry ever since. They’ve taken risks, they invested in original content before anyone else, and they only explored the AVOD model when consumers and the economy seemed to demand a new way of thinking.
Netflix only launched the AVOD model for six weeks. They have only had six weeks to build up viewership, and with so many subscribers already, how many will actually convert to the lower tier? Plus, it is the holiday season. People are busy shopping, gathering and celebrating. Is making minor adjustments to their budgets, or signing up for another streaming subscription service top of mind? Probably not.
Netflix has to grow their AVOD subscriber base. Maybe they were ambitious with viewership expectations early on, but this will turn around, and the advertisers who bailed on them early may regret it. Our money is on Netflix.
