Netflix continues to say it has no strategic interest at all in launching a version of its streaming service that includes ads — and would rather avoid the privacy pitfalls of collecting consumer data.
Chairman and CEO Reed Hastings on Tuesday again shot down the notion of an ad-supported Netflix service, after he was asked on the company’s fourth quarter 2019 earnings interview about advertising by moderator Guggenheim Securities’ Michael Morris.
“Google and Facebook and Amazon are tremendously powerful at online advertising, because they’re integrating so much data from so many sources,” he said. “I think those three are going to get most of the online advertising business.” For Netflix to grow to a $5 billion-$10 billion advertising business, you need to “rip that away” from incumbents, Hastings said: “Long term, there’s not easy money there.”
By the same token, Netflix — by not serving targeted ads — is not exposed to data-privacy issues and related controversies. “We’ve got a much simpler business model, which is just focused on streaming and customer pleasure,” he said. “So we think with our model that we’ll actually get to larger revenue, larger profits, larger market cap because we don’t have the exposure to something that we’re strategically disadvantaged at, which is online advertising against those big three.”
Added Hastings: “We want to be the safe respite where you can explore, get stimulated, have fun, enjoy, relax — and have none of the controversy around exploiting users with advertising.”
Hastings’ comments come after NBCUniversal last week unveiled more details about Peacock, its forthcoming streaming service, which will include a free, ad-supported tier. Other ad-supported VOD plays gaining traction include Viacom’s Pluto TV and Tubi. In addition, Disney-controlled Hulu has long offered a cheaper, ad-supported tier, saying that some 70% of its subscribers are on the $5.99 package that includes ads.
Netflix has routinely batted down questions about Netflix’s opportunity in advertising, pointing out that being ad-free is a core part of the appeal to consumers.
In its Q2 2019 investor letter, Netflix spelled out the reasoning for why it’s not going to be putting ads in front of its viewers. “We, like HBO, are advertising free,” the company said. “That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”
Among industry observers, there’s been regular speculation that Netflix could find it attractive — or necessary — to enter the advertising biz as its content spending continues to climb. In a report last year, Nomura’s Instinet analysts calculated that Netflix could generate more than $1 billion in ad revenue per year if it launched a plan with advertising, with $700 million of that dropping to the bottom line.
However, Netflix’s potential to reap billions in advertising money doesn’t fully account for the fact that any ad-supported service from Netflix would cannibalize its existing business; in other words, subscribers would move down to cheaper ad plan from ad-free tiers. In addition, Netflix would have to invest in standing up an advertising platform and sales force from scratch.