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If Netflix’s business models were structured like the Marvel Cinematic Universe, the company would be about to enter Phase 3. Phase 1, of course, is when the company launched its DVD-by-mail service in 1999, transforming the way DVDs were rented. Phase 2 began in 2007, when it supplemented its DVD subscriptions with a streaming video-on-demand service, ushering in the modern era of streaming entertainment. Phase 3 of the Netflix Revenue Universe (the NRU?) will begin in earnest in November, when the company launches its advertising-supported streaming tier.
Yes, it’s still streaming video, but it’s also an entirely new ballgame. “Obviously, they were a first mover in the streaming landscape overall, but they are a late mover in the advertising space,” says David Cohen, CEO of the trade organization Interactive Advertising Bureau (better known as IAB), which develops industry standards around advertising, and hosts the annual “Newfronts” advertising event.
And nowhere is Netflix’s adoption of the advertising revenue model more apparent than in its willingness to embrace (or at least engage with) third-party measurement and verification companies. “Audience measurement is incredibly important to advertisers,” Netflix’s global president of advertising, Jeremi Gorman, told reporters at a press conference Oct. 13. Five days later, the company disclosed that it added 2.42 million paid subscribers to top 223 million global subs in its third quarter, forecasting an addition of 4.5 million in Q4.
As it launches its ad effort in the United States, Netflix will engage Nielsen — long the home for the TV industry’s ad currency — to “enable advertisers to understand how Netflix can reach their target audience,” per Gorman. Netflix will be available through Nielsen’s Digital Ad Ratings (DAR) sometime in 2023, and will eventually be reported through the Nielsen ONE platform.
In the U.K., Netflix has signed on for the Broadcasters’ Audience Research Board (BARB), which will provide a similar service. To be clear, Nielsen will be tracking only Netflix’s ad tier, and only in the U.S. (though the partnerships suggest the company may cut local deals in other markets), but it is a significant leap forward for a company that only a year ago launched a website to see what its top 10 TV shows and movies were.
Netflix is also using ad tech firms DoubleVerify and Integral Ad Science to track viewability (whether someone has actually viewed an ad) and traffic validity (that the ad metrics aren’t being distorted by bots or scammers).
“They are reacting to marketplace dynamics, and what the market is requiring,” Cohen says. “The market has become quite habituated and quite familiar with a set of verification and viewability providers and currency providers. And they’re just getting in the game.”
Advertising requires adapting and responding to the needs of others, and third-party verification is just step one. At launch, Netflix will allow only targeting that’s based on geography, or programming genre, though Gorman notes that the company will collect age and gender information from users, which may be used later. “Netflix data will only be used to support advertising on Netflix, and will not be used for targeting or profiles elsewhere,” she noted to reporters.
And Netflix appears to have a long runway to evolve its offering, with Gorman noting that it is “nearly sold out” of its initial batch of inventory, with hundreds of advertisers signed up so far.
That suggests strong pent-up demand. “The reality for marketers is that if a media company has the combination of clearly top-flight, premium content and a massive eyeballs number, that translates to a ton of consumer intention,” says Matt Spiegel, executive vp of TransUnion’s media and entertainment vertical. “Marketers have to be interested.”
Still, some evolution will be necessary, according to executives in the ad space.
“If Netflix is going to get a bunch of ad dollars, they’re going to have to find that balance to be able to tell a marketer, ‘Hey, listen, we are helping you reach some type of defined segment now,’” Spiegel adds. “Historically, as we all know, television is just an age and gender game. Clearly in the streaming world, you can get much more sophisticated.”
Netflix transformed how TV was viewed with its advanced streaming tech, enabling “binge viewing” by dropping all episodes at once, and through its powerful recommendation engine. And that history of innovation could lead to similar approaches to advertising. Cohen notes that among the executives hired by Netflix is Peter Naylor, who helped Hulu develop some of its unique ad formats in the mid-2010s (think pause ads, or letting users choose between regular ad breaks and one long pre-roll spot).
“I would imagine once they get the basics right, Netflix will be off to the races and doing kind of a whole bunch of new and innovative stuff,” Cohen says.
“What we do at launch will not be representative of the long-term opportunity of what the product will be,” Gorman said of its offering, which is limited to 15- and 30-second pre- and mid-roll ads at launch. “Our roadmap is TBD, and we will continue to innovate and lead in the space.”
But there was also another question top of mind to advertising-world executives after Netflix officially pulled back the curtain on its ad plans. A question related to old-fashioned, in-person salesmanship. Will it host an upfront?
The spectacles, held in May and often punctuated by star power and musical performances (which Netflix could certainly provide), trace their legacy to broadcast TV’s Fall to Spring season, but even with streaming now the belle of the ball, the upfronts, and their digital counterparts the IAB Newfronts, persist. Indeed, a high-level source on the brand side of the advertising business says that they would be “shocked” if Netflix didn’t hold an upfront; the only question is “When?”
“We think it may take a little while to scale impressions, build audiences and ultimately deliver a platform that can take in major advertising dollars that satisfy frequency and reach requirements, so we think Netflix will be a disruptor in the 2024 (but not ’23) TV upfronts,” wrote Wells Fargo analyst Steven Cahall in an Oct. 14 research note.
All of Netflix’s competitors in the entertainment space (NBCUniversal, Disney, Paramount, Warner Bros. Discovery) play the upfront game, and even YouTube, which previously hosted the capstone event at the IAB Newfronts, moved its event to TV’s upfront week this year. The upfront week is tightly packed, but one thing is sure: Advertisers would be happy to have Netflix there. Or it could even take YouTube’s place as the culminating event of the Newfronts.
Would the IAB welcome Netflix into the fold? “With open arms,” Cohen says.
A version of this story first appeared in the Oct. 19 issue of The Hollywood Reporter magazine. Click here to subscribe.
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