Netflix shows we were too quick to abandon ad model en masse, subscriptions may be inferior

The media industry has been wed to ads since the very beginning. It really is a match made in heaven if you think about it. It results in a win-win-win situation where the content creator, the advertiser and the end consumer all have something to smile about.

The content creator is paid by the advertiser to include promotional material with his content. This allows him to charge less for his content, thereby increasing the pool of people that can afford it.

The advertiser gets his wares in front of many people’s eyes. Then the end consumer doesn’t have to pay much to view the content, the cost is subsidised by the advertiser.

The newspaper

As a kid, I used to wonder how a whole newspaper could cost $1. Even as a kid, I could tell there was no way it would cost less than a dollar to print out that whole thing, complete with colour photographs and then distribute it across the country.

Just the printing and distribution costs looked massive to me and that was before the expensive bit – the human resources. Reporters on the ground, editors in cushy, air-conditioned offices and everyone in between needed to be paid.

A single dollar for a whole newspaper which has contributions from scores of reporters just would not be enough. I was told advertising was where the big bucks were and I grew up comfortable with that model.

Even on television. We used to love the commercials, the memorable ones at least, that aired on national television. We understood they were necessary for us to pay just a token of appreciation to get ZBC in our living rooms. For the youngins, there was a time when we actually wanted ZBC-TV in our living rooms.

That has not really gone away. People still love talking about the most creative ads. You should see just how Superbowl commercials are huge in the States. It feels like they get even more coverage than the actual football games themselves sometimes.

It’s just that in Zimbabwe we don’t really have some national thing that everyone watches anymore. We are all in our little silos because ZBC-TV just won’t bring us together. So, it’s understandable that we would forget that ads are a part of popular culture sometimes.

The subscription model

See, even when the internet became a thing, ads found a way to pay for everything. The internet is mostly free to use once you have access because advertisers pay for it.

That was the case but some felt the ads model was not exquisite enough for the 21st century and decided it was time that the subscription model finally took over.

Instead of messing with their pristine work by cutting to commercials on TV, for example, creators could just ask their consumers to pay for ad-free content and cut the corporates from the equation.

The sell was – ads were a nuisance for the consumer and they would be willing to pay to not have to see them. It is a neat theory. And note, we are not even talking about ad abuse here, just the normal, tastefully delivered ads.

This subscription model has been all the rage this side of 2010. Any media house seen to be embracing ads was seen as a dinosaur, stuck in the ways of the past.

Netflix subscriptions

Netflix shook the video content space with their simple subscription plan. They proved that consumers were tired of ads and were willing to pay a premium to have an ad-free experience.

Everyone took notice and everywhere you turned most content creators started hiding their work behind paywalls. The data was clear, customers wanted this. They hated ads.

This went on for a while until literally everything was hidden behind some paywall. You had to pay to be allowed access and it all started to become a little much for consumers but content creators did not notice.

It would be expensive if you had to pay to access every single bit of content you love to consume. That was starting to become reality for many and when the global credit crunch hit, even those in first-world countries found that they didn’t want to pay for this content. Couldn’t someone else pay for us, some kind of sugar daddy?

Netflix falling in love with ads

It is poetic that Netflix, one of the companies that showed that a subscription model was the way of the future, was one of the first to be bitten by that philosophy.

Netflix started struggling to tack on subscribers, reporting a drop in subscribers for the first time last year. In their country where investors require growth over even profitability, something had to be done.

Netflix turned to the trusty old sugar daddy – advertisers. The sugar daddy never disappoints, he is always ready to engage and pay for all of us to access these things for less than we should.

The Netflix ad-supported plan was seen as a desperate move. Commentators scoffed at them. They had failed to run their business and were now turning to a model that had been proven to not work. Except that’s not what’s happening.

Ad-supported already beating subscriptions

Netflix’s ad-supported plan was only introduced in November 2022 and is not even available globally yet. Despite that, in its first-world home country, Netflix reports that in Q1 2023, per-member revenue from its ad-supported tier exceeded per-member revenue for its subscription plan.

The standard plan there costs $15.99 whilst the ad-supported one costs $6.99. Despite this, Netflix makes more from the member that’s paying $6.99. Impressive. The sugar daddy is making it worth Netflix’s while.

We are back to the beginning, advertisers mean Netflix can offer its content at a lower price and still earn more than they would had they required the full payment from the consumer. The advertiser gets his products in front of millions of eyes, possible because of the lower price. And note the more consumers buy in, the better for Netflix as well. The consumer pays less for the content. A win-win-win. Why mess with this winning formula?

Wow. So even in those countries where people can most afford to do away with ads, many are still choosing the cheaper ad-supported version? Who knew?

To be accurate, there are still many more members on the subscription plan and so subscription revenue still bests ad-supported revenue.

However, with Netflix now making more money per member from the ad-supported plans than the subscription plans, you can bet your bottom dollar they are going to be pushing those even more.

Sweetening the ad deal

In fact, Netflix has committed to increasing its investment in the ad business, upgrading its “ads experience with more streams and improved video quality to attract a broader range of consumers.”

Netflix announced that the ad-supported plan will be getting support for 1080p quality and two concurrent streams, features it didn’t have at launch. They are trying to sweeten the deal and make more people choose it over the subscription plan.

Netflix says investors should expect revenue growth to accelerate in the second half of 2022. The ad business was cited as one of the catalysts of that growth.

We shall see how it all pans out but Netflix seems to be confident.

What do you think about all this? I know that no one can really say they love ads but are you willing to pay to get an ad-free experience or are ads a suitable compromise to get stuff for free or cheaper? Do let us know in the comments section below.

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