Netflix’s New Ad Rates Reflect a New Reality: It Isn’t Bulletproof

Netflix isn’t going out of business anytime soon, but the streamer is doing its best Bed Bath & Beyond imitation by slashing prices for its advertisers. The Wall Street Journal on Thursday reported Netflix lowered rates for advertisers and reworked its ad-sales deal with partner Microsoft. Gone are the days of CPMs (cost-per-thousand views) in the $45-$55 range; now it’s more like $39-$45.

Also gone could be the days of Microsoft’s exclusive dibs as Netflix’s ad-tech partner; per WSJ, Netflix had early talks to sell ads through other partners. Microsoft guaranteed Netflix a certain level of advertising revenue; that (unknown) number is also being reduced. The promise proved ill-advised; Microsoft has been forced to pay Netflix the maximum penalty allowed by the contract, the WSJ stated.

A Netflix spokesperson declined IndieWire’s request for comment on the lowered CPMs and the reworked Microsoft partnership.

Both reported moves share a similar goal: bringing in more advertisers. Netflix’s “Standard with Ads” plan has drawn impressive ARPU (average revenue per user, though Netflix calls it ARM — average revenue per member) but, as of yet, not a ton of subscribers.

Netflix has said its ARM on “Standard with Ads” is higher than the $15.49 per month that an ad-free “Standard” subscriptions bring in. “Standard with Ads” costs the consumer $6.99, which means a customer on that tier watches at least $8.50 of commercials per month.

Netflix executives realized years ago they need ads — especially to properly monetize subscribers in emerging (read: poorer) countries. That declaration was sacrilege at the original SVOD platform, but no one seemed to realize exactly how much they needed them.

More ad-tech partners should bring in more advertisers. In turn, more advertisers — even at a lower CPM — should bring in more advertising revenue. It’s a trade-off of CPMs for scale; the new CPM range is much more in line with what other streaming-video services charge, which should help sell ads on Netflix’s non-Top 10 shows. (Should Netflix end up adding live sports, the CPM can rise again.)

Netflix’s ad-supported business, which launched in the U.S. in November, got off to a very slow start. That’s improving, but could still use a shot of adrenaline. Today, just 3.3 percent of Netflix’s U.S. subscribers are on the ad-supported tier, according to data from subscription-analytics firm Antenna. While that was nearly double the rate at the end of March, advertising still does not provide a level of revenue that Netflix considers to be material.

Netflix CFO Spencer Neumann said during the company’s Q2 earnings call last week that advertising “is not expected to be a big contributor (to revenue) this year.”

According to ratings-currency company Nielsen’s monthly “The Gauge” report, Netflix in June accounted for 8.2 percent of all TV and streaming viewing. That was good enough to be a personal-best in terms of market share, but Netflix remained second to league-leader YouTube, which also hit a new high of 8.8 percent.

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