Netflix set to disrupt NZ’s television advertising market

Last week’s announcement by Netflix to sell advertising will have significant implications to the advertising industry. Antony Young, co-founder of The Media Lab, explores what it will mean when this arrives in New Zealand, the potential it has to shake-up the media landscape and whether it could catalyst a renaissance in local television creativity and advertising.

In case you missed last week’s announcement.

After years of resisting advertisements on its streaming platform, Netflix confirmed it would be introducing commercials that would accompany lower priced subscriptions, and a crackdown on password sharing. An ad-free service would still apply to existing plans. The company confirmed that there were 100 million plus households that are currently enjoying Netflix, but not directly paying for it. This news coincided with their Q2 earnings report revealing it lost 970,000 subscribers.

Netflix announced it had signed an exclusive deal with Microsoft to power its adtech and sell its advertising inventory.  

When will it happen, what shape will it take?  

Netflix says it plans to introduce ads from early 2023 and will “start in a handful of markets where advertising spend is significant.” Clearly, the US market will be a key focus which commands its largest subscriber base and where they face fierce competition from Hulu, Paramount+ and Peacock (NBC) services alongside global players Amazon Prime, Disney+ and Apple+. The next tier of markets in terms of Netflix subscribers is Brazil, the UK, Germany and Canada. What is interesting for New Zealand is that Australia is the next largest market in terms of subscribers, and a larger advertising market than Brazil and Canada. Australia could be an early target to launch advertising, which opens up New Zealand potentially earlier. A good guide to how Netflix might approach its ads is what other premium streaming services HBO Max and Peacock do. They run about four minutes advertising per hour, with minimal advertising in their newly launched original shows.  

Why is this happening now?

Clearly, the streaming market is maturing, if not becoming overcrowded. The eye watering investments in original programming was only ever sustainable when subscribers and Netflix Inc.’s stock valuation soared. Their share price is now some 68 percent off its peak in October last year. With subscriptions flatlining, now is the time to add a second revenue stream. Adding additional subscribers, and potentially converting households that have piggy-backed off subscriptions will more likely be possible with an ad supported, lower subscription cost. The announcement several months ago that Disney+ will also introduce ads helped soften up consumers.  

Why Microsoft?

Netflix were always going to need an adtech solution to serve and manage ads. While the likes of Disney+ have developed their own Connected TV ad platforms, Netflix didn’t really have sufficient  advertising expertise in-house. Microsoft’s approach to user privacy was a strong reason for them coming into the mix. Their recent acquisition of AT&T’s data-based advertising technology brought a market-ready ad platform to enable them to come out of the gates with an advertising service relatively quickly.

What are the implications to the New Zealand ad industry?

In a word, significant. 

New Zealanders are already viewing Netflix en masse.  

NZ On Air’s report on TV viewing last year, revealed that nearly two thirds of New Zealanders over 15 have access to Netflix with 40 percent watching the service every day. Those viewers are higher income and skew under 44, in contrast to broadcast television that skews over 55. I’d expect New Zealanders will embrace a lower priced advertising supported subscription. That would unlock a large, desirable audience advertisers haven’t been able to access.

A Television market disrupter.  

Others will likely follow. Disney+, Amazon Prime and Neon are obvious candidates, while Apple+ might hold out. TVNZ and WarnerBros. Discovery (TV3, Bravo, Eden and Rush TV) will have their work cut out for them. TVNZ have done a good job investing in TVNZ+, but despite a free service they get less than half Netflix’s audience and will likely see its premium advertising pricing come under pressure.

Good news for the advertising creative industry.  

More accessibility of commercial premium video media could be a boon for local video production.  Online video ads have seen enormous growth in the past few years. It’s another thing watching video on your phone versus seeing it streamed onto a 4K 65-inch OLED TV panel. I’d expect to see marketers want to double down on video advertising and upgrade the quality of their brand messaging. Added creativity and higher production values could be more in demand as local advertisers will want to capture better targeted, premium video on demand opportunities.

Antony Young is a co-founder of The Media Lab (formerly The Digital Café), Wellington’s largest independent media agency. He spent twenty years heading media agencies in New York, London and Asia, before returning back to New Zealand.  

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