What you need to know:

• Global streaming platforms now in market or preparing to launch ad-funded tiers will struggle without sophisticated sales teams and concerted marketing, per Omnicom Media Group investment chief Kristiaan Kroon. He questioned Netflix’s long-term commitment to ads, given its lack of marketing.
• Magna MD Lucy Formosa Morgan thinks pushing subscribers onto ad-tiers by default – unless they actively opt to pay more for ad-free services, an approach taken by Foxtel with Binge – is a “better” model to get to scale fast.
• Formosa Morgan alongside Trade Desk lead James Bayes, Paramount digital sales chief Diane Ho and Foxtel Media’s innovation and ad product lead Bridget Murphy think advertisers will pay more for lower ad loads if sellers can deliver higher value – and guarantee better outcomes.
• Either way, said Kroon, “we’re about to find out”, but he thinks BVOD will “do very well” in terms of scooping up the lion's share of the $300m OMG forecasts will move out of linear TV this year.

Ad value

Netflix’s ad funded subscription tier will struggle to attract ongoing investment if it fails to improve audience numbers and reporting, per Omnicom Media Group investment chief Kristiaan Kroon. He thinks other global streamers planning ad-funded tiers without significant local sales infrastructure may look upon Netflix’s sluggish start as a cautionary tale – and questioned whether the streaming bellwether might ultimately shelve its local ad play.

Lucy Formosa Morgan, MD of IPG investment unit Magna, told the Future of TV Advertising conference that Binge has a “better” pricing model, because it is effectively rolling existing subscribers onto an ad tier by default  – unless they actively opt to pay circa 50 per cent more for no ads. (That approach has paid dividends in the US, where Disney+ is outstripping rivals Netflix and HBO in attracting new subscribers to its ad tier.)

The buyers were underwhelmed by Netflix’s slow start and lack of robust reporting and marketing given the premium it is reportedly charging. But they said the emergence of ad-funded streaming platforms provides a chance to test the theory that advertisers will pay more for lower ad loads that deliver better results.

The $65 mille question

Some buyers suggest Netflix is on average charging up to 50 per cent more per CPM (cost per mille – French for 1,000 – viewers) than broadcasters’ BVOD rates, which broadly range from a $30-$55 CPM depending on the network and targeting parameters. Netflix is thought to be charging average CPMs of around $65 in Australia with some analysts suggesting Microsoft's global deal to sell Netflix advertising via Xandr was on a guaranteed $50 CPM.  

Neither Kroon nor Formosa Morgan would divulge a ballpark figure, only that the streaming giant is charging more.

“There is a premium,” per Formosa Morgan. “But as the launch has passed and things start to settle [the quantum of that price premium] will come back.”

Advertisers, she said, are prepared to pay more for lower ad loads that have a better chance of cutting though to audiences. “Clients are open to it … if you can guarantee greater attention.”

OMG’s Kroon said the launch of Netflix and Binge’s ad tiers, with Disney+ set to launch ads later than expected this year, will prove one way or another whether brands are prepared to pay more to feature in shorter, less frequent ad breaks. Both Netflix and Binge have initially launched with circa four minutes of ads per hour versus 13 minutes for linear TV and BVOD working to similar loads.

“We’ve talked to networks for a long time about lower ad loads [and whether advertisers will pay more for them]. We’re about to find out, because that is where SVOD is now at,” said Kroon. “But effectiveness will determine where that CPM settles over time”.

Sell pressure

Kroon is unconvinced the international streaming platforms will succeed without fully resourced media sales units on the ground (which may shape the medium-term thinking of players such as HBO, which recently inked a major new deal with Foxtel).

“If you have an existing infrastructure, say Binge with the Foxtel ad machine, you are well set up to do this. If Stan ever decides to do ads, they’ll have the benefit of the Nine sales team,” per Kroon.

“Netflix, even with all the support of Microsoft [which locally is selling ads through Xandr], is finding out just how hard it is to run a really sophisticated sales team and move into the space,” said the OMG investment chief.

“I think other providers will also find that as well; Disney has kicked back its launch date in this market, apparently. It's complicated, it's hard to do. I question how wedded Netflix is to [advertising] over the long term if the numbers don't rise. It's interesting, they haven't done any big marketing.”

Netflix has recently started pushing some small scale digital ads – as Magna's Lucy Formosa Morgan pointed out. But its brand marketing approach to date, five months after launch, is virtually zero, leaving some buyers perplexed, given Netflix has taken tens of millions of dollars from holding companies in return for small audiences, basic targeting and reporting. Buyer beware aside, streamers across the board selling ads need to quickly get their data and reporting up to standard, per Kroon.

“We'll support it for now, test and learn – and then we'll move forward. [But] we need that unified measurement. We need to see that data come through, otherwise we won't continue to pay a premium.”

BVOD for the win

Kroon suggested the lion’s share of the $300m in ad revenue he forecasts will move from linear TV this year will likely be cannibalised by broadcasters’ BVOD businesses. He stood by OMG’s minus 10 per cent prediction, but said focusing on percentages risks distortion.

“Last year the total market grew by 16 per cent. In January last year linear TV was up 25 per cent [year on year]. So it's not surprising we're seeing quite big declines in linear TV. January-February combined [in 2023], it’s back 17 per cent. Our forecast is minus ten per cent for the year. So clearly we think things are going to get a lot better for linear TV through the rest of the year.”

Still, where does that 10 per cent revenue loss, or $300m, end up?

“It will fall into BVOD, [ad-funded] SVOD will take a little bit, then it will cap out and you'll start looking at YouTube,” reckons Kroon “Linear is in structural decline. There's nothing they can do about that; it's due to how we decide to count the audiences. But BVOD will be the first place that money looks to go – and it will do very well.”

Make-good bad times

In the meantime, agencies are grappling with make-goods – making up for the audience shortfall promised by TV companies to marketers who paid for a given campaign based on the eyeballs promised.

Per Formosa Morgan: “All the teams in agencies are doing at the moment is chasing make-goods.”

Kroon agreed. “It's a major problem for everyone – for clients, for us, reporting, for auditors. It's not getting any better. There is some automation … but not for everything, certainly not big amounts of money; it's extremely labour intensive. Our customers don't want to pay us more for the services we provide unless there's a really good reason to do so. Make-goods are not considered a good reason.”

Kroon suggested TV networks must raise their game on forecasting, but said advertisers – and agencies – must also shoulder some responsibility.

“We need to find a better way to approach total TV. Everyone talks about it like it's a simple idea. It's really hard.”

Less, and more, is more 

James Bayes, local lead at The Trade Desk, and a former Seven and SCA sales chief, suggested TV networks have a narrowing window to decide their ad load and user experience strategy to avoid increasing revenue leakage to other channels.

“You look at the ad funded tiers on SVOD services and they appear to be consolidating around four minutes of ads an hour, which is obviously different to the ad model that we see for BVOD. That's something that we as a business are really interested in,” said Bayes, alongside contextual signals and identity programs  – i.e. tracking and audience matching identifiers attached to TV impressions to deliver targeting.

“The supply side [i.e. the TV companies] needs to really lean in so that we manage to hold as much [ad revenue] within the premium content space as what we can,” said Bayes. “Advertisers are prepared to pay more – provided they're able to be selective about what impressions they want to buy,” he added.

Bridget Murphy, Digital Innovation & Advertising Product Director at Foxtel Media, said Binge will launch with a maximum four minutes of ads per hour.

“In terms of frequency caps [the amount of times the same ad is shown to a viewer], it’s one per hour, three per day.”

Murphy sidestepped questions about the premium advertisers are willing to pay for a reduction in ad loads on Binge versus BVOD and especially free-to-air TV, but said Binge ads prices "reflect the value we offer".

Paramount ANZ digital sales chief Diane Ho suggested both Netflix and Binge “are expensive and at a premium” versus BVOD. But she said streamers could justify higher prices. That may prove a useful hedge should Paramount+ introduce an ad-funded tier this year or next.

“It’s driven by demand, but also, it’s a lighter ad load. So why wouldn’t you expect to pay more for that?”

Binge versus Netflix versus inflation

Ultimately, suggested Magna’s Lucy Formosa Morgan, streamers pushing into ad-funded models need to deliver on both UX and scale.

“I go back to the user experience, and from a buyer perspective, there is so much choice out there.” That means more trial, and most likely, more error – which may be why other global streaming players such as Paramount+ now appear to be leaning towards late mover advantage.

“Netflix obviously launched with weaker numbers than what we probably all hoped for or thought we'd see to start with, which didn't help. It is picking up, but probably not to the extent that we hoped to see by now,” said Formosa Morgan.

“How Binge’s launch goes will definitely be interesting, but I think theirs is probably a better pricing model in terms of what they're asking consumers to do, i.e. no change, unless you want to pay more to go without the ads.”

She thinks that approach may be well timed, given rate rise increases and subsequent belt tightening.  

“There will be more churn, more rationalisation of the SVOD [streaming] apps people are watching,” per Formosa Morgan. “So I think all of the agencies will just have to be more nimble about how and where they're advertising and who they're spending with – because you're trying to chase viewers who are moving around and trying to save cash.”