The $6.99/month subscription service with ads (Basic with ads) really saved Netflix. Netflix recently announced that its ad-supported subscription service now has more than 40 million monthly active users worldwide, which means that in just four months, their ad-supported subscription membership has grown by more than 17 million. With such a proud result, Netflix announced that it will launch its own advertising platform and no longer cooperate with Microsoft on this technology.
According to the timeline released by Netflix, it will begin testing its own advertising platform in Canada later this year, and plans to launch the platform in the United States by the end of the second quarter of next year, and launch the platform in all regions by the end of 2025. In other words, after less than two years of cooperation in the advertising business, Netflix chose to leave Microsoft alone.
There is no doubt that Microsoft is really being used as a tool by Netflix this time. So the question arises, why is Netflix so eager to choose its own advertising platform?
All of this is, of course, because of the growth of ad-supported subscription services, which has amazed Netflix itself. Previously, in November 2022, Netflix launched an ad-supported subscription plan as an attempt to boost revenue amid slowing subscriber growth. Considering Netflix's previous insensitive attitude towards advertising and the complexity of the digital advertising system itself, Netflix's strategy was to seek external support before launching an ad-based subscription service, given that building a programmatic delivery system and building an ad sales team is a systematic project.
At the time, Netflix approached Trade Desk, the world's leading digital advertising platform, Comcast's FreeWheel, and Microsoft's Xandr. In the end, Microsoft won by providing Netflix with a "revenue guarantee", after all, the latter was still extremely unconfident about advertising on streaming. You must know that in the past, there were two payment models for video streaming platforms on the Internet, one is Netflix's pure payment plan, where users need to pay in advance to use related services, and the other is the free + advertising model of domestic Aiyouteng and overseas YouTube.
Netflix's ad-supported subscription service, on the other hand, is similar to the traditional U.S. cable network's billing model, requiring users to pay directly and have ads. But Netflix's rapid rise in the new century relies on snatching viewers from TV stations. If it comes out, it is inevitable that Netflix will have some confidence in replicating the payment model of traditional American TV networks such as CNN and Forbes. At this time, the back-up plan provided by Microsoft is naturally a relief in the snow, but Netflix did not expect that taking the retro route can also get the support of a large number of users.
By cracking down on shared accounts, Netflix selected a group of price-sensitive users, and combined with an ad-included subscription service that costs only one-third of the highest package, they received 5 million new subscriptions in just half a year, reversing the decline in user growth in one fell swoop. Eight months later, Netflix announced that it had 17 million ad-supported subscribers, and now that number has reached 40 million. According to Visible Alpha's projections, by 2026, nearly half of Netflix's new revenue may come from ad-supported subscription services.
Why not only have the ad-supported subscription services not been left out in the cold by consumers, but have been an unprecedented success? In addition to the age-old problem of poor market environment, more importantly, the overseas video streaming market has expanded dramatically during the epidemic period, with the emergence of Netflix, Amazon Prime Video, Hulu, Disney+, Apple TV+, and HBO NOW leading to an unprecedented boom in this market, and in order to meet their own entertainment needs, users were previously more inclined to subscribe to streaming services on multiple platforms.
But the problem is that although the monthly fee of a video streaming platform is more than a dozen dollars, it is not much, but it cannot support the large amount. According to relevant statistics, the average number of subscriptions to streaming media platforms per American household before the epidemic was 2, but in 2023, this number will rise to 4, which means that the payment pressure has increased by 100%. As a result, if you want to continue to see more comprehensive content, an ad-supported subscription service becomes a more cost-effective option. In this context, Netflix chose not to publish the size of its users, but instead emphasized more attention to "user engagement".
"User engagement," or the amount of time spent per user, is a metric that is closely related to the value of Netflix's ads, and it is enough to see that the company has made advertising a core pillar of its business. After advertising has become the de facto "second growth curve" for Netflix, Microsoft's presence has become abrupt. According to the agreement between Microsoft and Netflix, advertisers who want to run ads on Netflix will need to make a purchase through Microsoft.
From Netflix's point of view, Microsoft is now playing the role of Apple's App Store. Although Netflix's popularity on mobile has contributed to the App Store, after all, it is only through the latter that the Netflix app can be pushed to users. As a result, in December 2018, Netflix notified new and renewed iOS users that it would no longer offer an in-app payment channel, but would instead require them to register or pay outside the app to avoid the App Store's 30% commission.
Today's Microsoft is very similar to the situation faced by Apple at the beginning, that is, Netflix, which has stiffened wings, chooses to abandon its former partners in order to maximize profits. It can only be said that Netflix and Microsoft obviously failed to imagine that even if they want to watch ads, a large number of users will gladly accept to watch Netflix content at a lower price. So much so that Microsoft has cultivated a strong competitor for its own advertising business.