A matter of time. Netflix is testing advertisements in its online streaming service.
The company hasn’t confirmed whether it’ll roll ads out on a wider scale, but it’s experimenting with showing advertisements at the beginning and ending of streaming content for people watching on Xbox 360. Motherboard’s Jason Koebler described the experiment as “the HBO model” since it’s only showing ads for its own original content, just like HBO does.
The company isn’t discussing its ultimate aims, to no one’s surprise. However, the ad trial is likely meant to open the door to new pricing options that do more than tweak the number of simultaneous streams.
Netflix could offset price hikes (and undercutstreaming rivals) by launching a cheaper, ad-supported tier; alternately, it could compensate for slowing growth by asking you to pay more for ad-free viewing. We’re certainly hoping it’s the former rather than the latter.
Either way, it’s clear that Netflix isn’t completely satisfied with its status quo.
Reed Hastings, Netflix CEO, has always been adamant that his service would never rely on advertising to pay the bills. But over the last week or two, a small number of users have begun seeing what they thought were ads, and the fiery complaints flared up on Twitter. A sampling of ire from just the last few hours is below.
— UnOrigMoniker (@unorigmoniker) June 1, 2015
Quote me on this later: The moment @netflix puts ads on my videos I'm canceling service.
— Lee Tratnyek (@kaplejon) June 1, 2015
Sir Martin Sorrell, the WPP chief executive, has said he believes that Netflix will have to look at introducing advertising to become profitable.
WPP, the world’s largest marketing services company, manages $78bn a year in advertising spend on behalf of advertisers.
Sorrell, speaking via video link at the FT Digital Media conference in London, was asked about the impact of ad-free online services such as Netflix and HBO Now built on the back of heavy investment in content.
“We make content [too],” said Sorrell. “We invest in Vice [Media], we invest in [House of Cards producer] Media Rights Capital. We are investing in content heavily. The last time I checked, while the Netflix model is a powerful one it hasn’t achieved that old-fashioned thing called profitability.”
Netflix has focused on rapid expansion, passing 60 million global subscribers in the first quarter of this year.
While the company made almost $1.6bn in revenue in the first three months this year, net income was just $24m.
And Netflix’s international operations continue to make significant losses.
Sorrell said he spoke to Ted Sarandos, Netflix’s chief content officer, at an event in China and was told that the company has a production budget of “$4bn-plus”.
According to Netflix’s financial filing for last year it has about $9.5bn in “streaming content obligations”, effectively payments to rights owners for content on the service, due in the next five years.
Sorrell said: “In those circumstances Netflix will have to raise subscription prices, and we know what happened last time, or have alternative revenue generation opportunities, one of which will be advertising.”
When Netflix raised prices in 2011 it lost 800,000 subscribers. The company also increased its prices in some markets last year.
The US streaming giant has said that it is aiming to make “material global profits” from 2017 onwards once its rapid expansion phase is complete.
Netflix also became a topic of discussion in a subsequent panel session looking at the rise of the online video market.
Dawn Airey, Yahoo’s European head, said the prospect of top-flight TV sports rights being snapped up by the new wave of internet giants as possibly the “last frontier”.
Airey, a former top executive at Sky, ITV and Channel 5, said that you can “never say never” to the possibility of a “Netflix Sports”.
She asked the audience what they thought the chances were of Google snapping up a slug of the UK Premier League rights, controlled currently by Sky and BT, in the next 10 years.