Back to the Future: Netflix Ad Push Has Echoes of Its DVD-by-Mail Era

The streamer’s plan to enter the advertising market recalls its early days, but will the company change its culture and embrace data transparency to be competitive in the modern era?

by Alex Weprin, September 21, 2022

Illustration by Design Lad

Netflix’s plan to get into advertising was unorthodox. It was seeking unusually high CPMs (the cost to reach 1,000 consumers), and targeting and tracking were nearly nonexistent.

The year was 2005. And Netflix decided the time was right to get into the ad business via slips placed in its iconic red DVD envelopes.

“My entertainment clients loved it because of the halo effect of being associated with Netflix,” recalls Michael Miraflor, a former media buyer and now chief brand officer of venture capital firm Hannah Grey. “And it offered a creative canvas that was large enough to fit proper key art.”

Netflix eventually folded its DVD ad sales team as it went all in on streaming, but 17 years later, it is trying to enter the space once again — with unusually high CPMs and minimal targeting and tracking. It’s still banking on that halo effect. “In a way, it’s like history is repeating itself once again,” Miraflor says. “Everyone was bummed out when they sunset the ad product and the ad sales team because of the pivot to streaming.”

Netflix’s renewed ad plans are just beginning to take shape. The company has a tech and sales partner in Microsoft, new leadership in former Snap executives Jeremi Gorman and Peter Naylor and a rough idea of what it is looking for (sources confirm that the company is seeking CPMs above $60, more than double most competitors, and offering very limited ability to target at launch).

“Advertisers have been kicking on this door for years now,” says Anthony Katsur, CEO of the IAB Tech Lab. “They are kind of a dream media company to work with.”

But, in the ad world, the big question isn’t whether Netflix’s ad push will be successful — virtually everyone agrees it will be — but whether getting into advertising changes Netflix, which long has prided itself on forging its own path in the cutthroat world of entertainment.

“The culture change is going to be significant. It is one of the most unique cultures I have ever come across — and proudly so,” says Kevin Krim, CEO of the data and measurement firm EDO. “The change will have to permeate that culture first, and then it will have to flow to the business model, the content, the technology.”

Oppenheimer’s Jason Helfstein writes in a September 19 research note that Netflix “is in a unique position to aggregate large audiences and control the timing of series launches for top-tier advertisers, commanding high CPMs.”

As such, Helfstein expects the streaming company to outperform its expectations as consumers flock to the less expensive tier, and as the company gains efficiency in monetizing them.

“The Street is not yet factoring in the advertising opportunity, and we believe sentiment should improve as more analysts update models,” he adds.

The biggest unknown, according to multiple players on the buyer, agency and brand side, is Netflix’s willingness to buy into the “three Ts”: transparency, targeting and tracking.

While Netflix has been loathe to divulge viewership data, it has softened. It now has public Top 10 lists and participates in Nielsen’s The Gauge, a product that looks at time spent on linear TV and streaming. While no one expects Netflix to provide more specific viewership for individual shows (unlike linear TV, streaming is usually sold by the audience advertisers want to reach, not the show they want their ad to appear on), there is an expectation that some things will need to become clearer. “We are about to enter the awkward adolescent phase of CTV [connected TV, with digital video ads delivered via TV sets], and Netflix isn’t any different,” Katsur says. “Dollars will flow to those partners that are more transparent.”

Adds Parquor founder Andrew Rosen: “Transparency is still a game, and they still have pieces to play.”

But Netflix is beginning to take steps in the targeting space. At launch, it will only allow marketers to target by genre or by viewers of its most popular shows. There will be limited geographic targeting as well. But, in the ad space, that isn’t enough. Linear TV is sold by demographics like age and gender — and CTV options can layer on intent to buy (In the market for a car? Recently bought a house?) a la Instagram. For Netflix to reach its full advertising potential, it will need a way to target those consumers.

Such maneuvers are “almost necessary to justify the price premium, unless the plan is to reduce CPMs over time as the platform scales,” Miraflor says.

Then there’s tracking, the third rail of advertising. Marketers like having as much data about who sees their ads as possible. Netflix, which has zealously guarded its customers’ privacy and data, is unlikely to buy into the status quo. But it will likely need to provide third-party proof that ads are being seen and resonating.

Beyond adapting to the advertising world’s needs, Netflix also risks transforming its business and its content. If advertising truly takes off and becomes a critical business for Netflix, it will need to adjust to the give-and-take nature of the business that companies including Disney and Warner Bros. Discovery know all too well.

“[As] advertising becomes a more critical part of their growth story, advertisers will gain more leverage and have more of a seat at the table,” Katsur says.

And, perhaps most importantly for Netflix: The temptation to tweak where the content budget gets spent could shift as well, in support of building time spent on the service.

“If you focus on audience size, you are not going to do some of the interesting, diverse programming that Netflix has done well with,” Krim says, noting that the company has built “a niche product for the masses.”

“Advertising changes that model in an interesting way,” he adds, noting that “it is going to take years to get to the full Netflix ad experience, but it will become something quite distinct, I am confident about that.”

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