Some Netflix NFLX users started seeing trailers of Netflix originals and a number of bloggers immediately jumped to the scene opening the floodgate on rumours about broader advertising on the platform. Then again, some users went out on social networks like Twitter TWTR threatening to terminate the $7.99 monthly subscription if any such thing ever happened.
It got so bad in fact that Netflix CEO Reed Hastings posted on Facebook FB: “No advertising coming on to Netflix. Period.” This fetched over a 1,000 likes, including one from Mark Zuckerberg (no prizes for guessing why).
And the company spent time confirming much the same to a host of reporters that reached out to it:
“Our policy around ads is unchanged. We have no plans to support third-party ad units.”
“We are running a test to show some of our original programming. As with any Netflix product test, this may never come to all our members.”
"They're not ads in the traditional sense. They are trailers for Netflix originals. As you know, we test hundreds of potential improvements to the service every year. Many never extend beyond that."
So much for the rumours that the tech sector thrives on!
But this could be a good time to weigh the pros and cons for investors. So here goes:
The primary concern for Netflix stakeholders is its rising costs. Solid content is what drives users to the platform and this content isn’t getting any cheaper. Netflix is also spending billions on original content and international expansion, which is also driving up its costs. Add to that the fact that it’s one of the cheapest streaming companies out there, and imagining that it’s getting harder to generate profits becomes easy.
But a picture often speaks more than a 1,000 words and here is one telling quite the opposite story.
After going through the numbers, you’d come to the conclusion that management is doing a good job, any way you slice it. But just in case the cost per sub doesn’t impress you, here’s another picture saying that streaming profits are on the rise (yes, despite the rising costs).
Part of the attraction of using Netflix is the absence of ads to spoil the experience. So this is not something Netflix is likely to throw away.
But it’s also producing original stuff, and what better place to showcase all that than before its existing user base? Particularly since it already knows a thing or two about those users, so the trailers probably wouldn’t be too intrusive.
Another reason this seems unlikely is that fact that it would get it into direct competition with TV (more than it is already). Right now, it can deny direct competition because there is no competition for TV ad dollars. But as soon as Netflix wants advertising dollars, a number of partners will be alienated.
Netflix may not be counting on its relationships souring, but just in case they do, it wants to have a whole lot of stuff it can offer users, and Hastings has admitted that this is the driving force behind its originals initiative. So if you read between the lines there, it kind of means that the more successful its originals get, the more likely it will be to serve ads.
That’s so far as the domestic business is concerned. When you go international, that’s a completely different animal. There is a lot of learning to do with respect to each new market and once most English-speaking countries are covered, these learning costs will likely increase. While domestic users expect an ad-free model, new international users may not, first because it would be free and second, because they haven’t been spoiled at the outset. Whatever Netflix picks up from internal campaigns or “trials” at this time could come in handy then.
The Market Is Heating Up
Some of the services like HBO Now, Hulu and Amazon AMZN video have been around for a while. But it’s time to stop discounting the music streaming companies (Spotify recently added some video). Apple AAPL is also around with its Apple TV and Microsoft and Sony are trying to get in on the scene leveraging their XB and PS devices. Tech markets evolve very rapidly and everyone soon gets into everyone else’s hair making the market extremely competitive.
Netflix depends on user growth for now, so if it wants to continue offering great content, it will either have to raise the subscription price (which will get increasingly difficult in a competitive market), or resort to ads just like everyone else is doing.
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