Sunday, October 9, 2011

The Netflix Effect – How Netflix’s Lack of Advertising is Quietly Shaping the Online Ad Industry

"How much for an ad on Netflix?" Ever since the video streaming service proved that Americans have an insatiable appetite for premium TV shows and movies, it’s a question that Netflix has heard from many inquiring media buyers. The answer, to the chagrin of Madison Avenue, is a resolute no – Netflix doesn’t run ads.

Despite the explosive growth of all-you-can-eat premium content services like Netflix, Hulu and iTunes, the supply of ads alongside ultra-premium content has struggled to keep up. That means a lot of glossy :30 spots all dressed up with nowhere to go; something advertising executives are beginning to notice.

On one hand, the boom in video streaming is fantastic news. Netflix and the like have proven that the demand for premium content is not satisfied by TV alone and thus have given advertisers a new media channel to run their heralded :30 commercials. The scale of this incremental video consumption is enormous – Netflix alone has 24 million subscribers, about a million more subs than Comcast.

Yet despite the enormous surge in demand for premium TV shows and movies, the supply of ads has been scarce. Hulu is the lone service to sell ad space alongside ultra-premium content but offers only a fraction of inventory when compared with the same programming on TV. No surprise, that limited inventory is in high demand, Hulu has 627 paying advertisers.

The Netflix Effect, or the scarcity of ad space alongside premium online video content, has a profound impact on the economics of digital media. Primarily, it’s helped prop up Hulu and the online video marketplace in general. Digital video ad spending grew 42.1% to $891 million in the first half of 2011, a significant percentage going to Hulu. The limited inventory is also forcing brands to rethink how to align themselves with premium content. As a result, media companies large and small, now have a production arm dedicated to branded content production.

Now Netflix represents 32% of all online traffic, too big an audience to ignore. Too much money to be made. It makes you ask, how did this happen in the first place?

Ironically, the fact that most consumers never cut the cord, meaning, they kept paying for cable even as they began to stream the same programming online, meant advertisers viewed capitalizing on online streaming as a luxury, not a necessity. This allowed Netflix’s growth to stay off the radar and ad free.

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  1. Please remove the mention of Netflix represents 24% of all online traffic in North America. It is not relevant to the discussion because this is about the quantity of data, not the number of eyes.

  2. Your point is well taken. I agree that bandwidth usage is more indicative of the type of data being consumed. Total streams would be a more appropriate metric but this was not available. I still think that bandwidth data along with total subscribers makes the point that Netflix is doing a whole lot of streaming.

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