September 30, 2022
With Netflix planning to launch an ad-supported subscription streaming tier in the fourth quarter, data analysis from Omdia suggests that by 2027 nearly 60% of the SVOD’s global subscribers will be on the ad-supported tier. This change would happen through a combination of new subscriber acquisition and the transition of existing subscribers to the ad-tier.
“Netflix is expected to generate just under a quarter of its revenue from advertising by 2027 in the U.S.,” senior research director Maria Aguete said in a statement. “With growth in SVOD expected to increase from $86 billion in 2022 to $118 billion in 2027, it comes as no surprise that all the major SVOD services, including Netflix, want to take part in that growth.”
Indeed, in the next five years, online advertising revenues will nearly double from $190 billion in 2022 to $362 billion in 2027, according to the London-based research firm.
Omdia expects Netflix to cap instream video ad loads and refrain from introducing ads in the user interface to maintain the premium consumer experience, particularly internationally, where hybrid models are not fully established. According to some reports, Netflix intends to keep the ad load below four minutes per hour. This is on par with rival HBO Max’s ad load cap, but below all other hybrid streamers in the U.S.
While in the U.S., Omdia expects Netflix to balance average-revenue-per-user (ARPU) for the lower-priced subscription plan via advertising to be roughly equal to the premium tier plan without ads, this will be a lot more challenging in far-less-mature international markets with lower CPMs (cost-per-thousand users) and smaller pool of premium CTV advertisers. Under this assumption, Omdia expects that Netflix will generate 23% of their U.S. revenue from advertising in 2027. Globally, this figure will be significantly lower at 14%.
Although advertising will not displace subscription as the main source of Netflix revenue, the impact of advertising on the wider competitive landscape should not be underestimated. Under this revenue model, Netflix will become a formidable CTV ad market player in the U.S., fully competitive with other prominent hybrid D2C models, such as Hulu, Peacock and Paramount+.