Netflix's Ad Tier Is Still A Cypher, Linear Takes Another Hit

1. Netflix's Ad Tier Is Still A Cypher

The acronym FAANG was possibly one of the worst things to ever happen to Netflix.

Mostly because it never made any sense.

Netflix was a very successful start-up that did one thing well while the other companies in the grouping were all multinational behemoths with multiple lines of business and billions upon billions in revenue.

And though many of us in the actual TV industry tried to point that out, Wall Street and the mainstream media just took the acronym and ran with it and it soon became conventional wisdom that Netflix was one of the big disruptive tech companies that were running the world.

Only it wasn’t, and every time its earnings reports looked markedly different than say Google’s or Apple’s, Wall Street would react with an unwarranted level of exuberance or pessimism and this manic-depressive behavior did not make it easy on Netflix.

Hence the ad-supported tier, which was rolled out during one of Wall Street’s depressive episodes, where Netflix’s decision to pull out of Russia after it invaded Ukraine resulted in its first-ever subscriber loss and the stock plummeted.

Which does not fully explain why the ad-supported tier is still largely a cipher despite being the key to Netflix’s future.

Why It Matters

Let’s start with how many ad-supported subs there actually are.

No one really knows: Netflix releases oddly un-crossreferencable stats.

As in “there are 325 million active accounts, and from those accounts, there are 190 million “monthly active ad-tier viewers”.

Which is great and all, but they don’t tell us on average how many people are associated with each account. 

Meaning, if there are an average of four viewers per account, then only 13% would be in the ad-supported tier.

And yet Comscore has data showing that ad-supported viewers were responsible for around 45% of all viewing hours.

And there are two other studies that are in and around that number.

So we can assume that there are a lot of ad-tier viewers but what we don’t know is how dissimilar they are from ad-free users. As in is there a sizable class and income gap?

Hub Research has some data that indicates this may indeed be the case, but it’s not conclusive.

Netflix’s ad tier numbers are also global and they do not indicate where their users are based. Leading to what’s become conventional wisdom that the tier is heavily weighted towards Brazil and Mexico where consumers are assumed to be way more price-conscious.

Which is a euphemism for “poor.”

So that is what we know and we also know that in order for an ad-supported tier to be successful, it needs to deliver around 60%-70% of all subscribers in any given market. 

Otherwise there are not enough people in the target audience to get any kind of reach plus there’s a suspicion among the ad agencies I talk to that the people subscribing to the ad-supported tier belong to a less desirable socioeconomic grouping than those in the ad-free tier.

Not our kind, dear.

What You Need To Do About It

If you are Netflix or any streaming service that is struggling to get an ad-supported tier off the ground, remember that volume matters.

And that the only way you will achieve that necessary 60%-70% volume is to launch a free ad-supported tier. 

This is especially true in countries in the Global South where few people have disposable income period, let alone disposable income for a streaming TV service.

And if you don’t, then YouTube, which is also a free streaming TV service, will gladly eat your lunch.

Fear not though, for those free tiers will have many benefits, even in the US, primary among them being the ability to keep lapsed subscribers in the fold where you can serve them up library shows, particularly older seasons of current hits, as a way to get them to subscribe—catch up now and then watch the current season.

It’s a strategy that worked for you with AMC and The Walking Dead, so why not use it for your own needs.

Finally, you will, at some point, have to give real stats about who your viewers are and where.

Because your competitors will, both your real ones and your FAANG ones, and at the end of the day the market is going to stop letting you get away with it.

Carpe diem.

2. Linear Takes Another Hit

Linear TV is like a slow-leaking balloon. At some point it will become unsustainable, but it will die the death of a thousand cuts: networks will cut back the amount of original content they create for linear, then eliminate it altogether and use linear as a next-day repository.

Which may be enough for enough people to actually keep it alive and profitable, but we’ve got a ways to go till we get there.

For now we have to deal with the fact that the amount of linear that is watched on TV keeps on shrinking, month after month.

At least according to Nielsen’s The Gauge.

Why It Matters

This past month revealed a further decline— 47.5% of all TV viewing was streaming, versus 41.6% for cable and broadcast.

Which is a sizable gap given how much people distrust The Gauge, claiming it does not do a good job of counting views from indirect channels, e.g. if you subscribe to HBO via Amazon, it allegedly credits those views to Amazon.

Meaning that, if anything, the streaming numbers should be even bigger. If not somewhat inaccurate.

But mostly it’s yet one more sign of many that shows that TV viewing is slowly but surely moving towards streaming, especially as sports and news make the move along with them

Whereas the inability to provide even basic advanced functionality—stop a show in your living room, pick it up a few hours later in your bedroom—seems designed to hasten linear’s eventual demise.

So there’s that too, and it’s a problem but given the shrinking profit margins, clearly not enough of one. 

Sort of like one of those department stores that’s about to go out of business only the racks are a mess, the shoes are out of their boxes and no one seems to really care.

What You Need To Do About It

If you are an advertiser, remember that linear is not dead. 

It’s just terminally ill with a slow-moving illness.

Meaning it is likely to hang on for a good while longer and may even see some sort of renaissance.

Or, more likely, a plateau.

Regardless it’s going to be with us till the end of the decade, likely longer, and will remain a valuable ad platform for brands looking to reach a certain kind of mainstream audience.

After all, 41.2% of all viewing is still a lot of people.

If you are a mainstream media reporter, resist the urge to write yet another “TV is dead” article based on the latest The Gauge numbers.

For to paraphrase Inigo Montoya, “You keep using that stat. I do not think it means what you think it means."

But feel free to steal the slow-leaking balloon analogy.

It’ll make for a more interesting story.