Netflix’s New Budget Option Will Feature Advertising, but not Gambling Ads

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Despite promises to the contrary, Netflix is looking at advertising to boost its revenue. North Americans who already feel inundated with sports betting and online casino ads will be relieved to know that gambling ads are not in the plan.

For some time now, change has been whipping through Netflix’s business. Subscriber growth, which powered a years-long stock surge, has ended. Netflix remains the clear leader in streaming entertainment with more than 220 million global paid subs. However, it has shed 1.17 million subscribers over the past two quarters, 970,000 of which came in Q2 2022.

While searching for ways to offset the decline in its subscriber base, Netflix is returning to basics. No, we’re not about to see the return of red prepaid envelopes. Instead, the company is going back to the roots of the very industry it set out to disrupt.

Partially Breaking the No-Ads Promise

From the start, co-founder and CEO Reed Hastings has been adamant about delivering an ad-free experience to Netflix customers. Famously, in an earnings call in January 2020, Hastings stated that:

We want to be the safe respite where you can explore, you can get stimulated, have fun and enjoy – and have none of the controversy around exploiting users with advertising…. We’ve got a much simpler business model. We’re not tied up with all that controversy around advertising.

As recently as Jan 2022, Hastings reiterated his opposition to commercials on Netflix’s platform. A few months later, the tune changed.

On its quarterly earning call in March, Netflix announced that some users would begin seeing ads on the platform starting in November. The change will include the US, Australia, Canada, the UK, Germany, and France to start. The company will roll it out in other countries as time goes on.

In its Q1 letter to shareholders, Netflix explained its plan:

We’ll likely start in a handful of markets where advertising spend is significant… Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering.. our advertising business in a few years will likely look quite different than what it looks like on day one.

It’s worth noting that not all viewers have to contend with ads, as subscribers will have the option to pay a higher monthly rate to stay ad-free.

Hastings has said that introducing ads will give cost-conscious customers more options and help create renewed growth in subscriptions. There will be a new ad-supported tier at a lower price point, with early rumors putting the cost at around $7 to $9 monthly. Another rumor suggests that Netflix original content and certain children’s programming will remain ad-free for both tiers.

Not All Ads Are Created Equal

The details of the new plan are still trickling out. However, we do have one fascinating nugget about the nature of the ads themselves. According to reports, Netflix will be excluding certain types of ads from its new subscription plan, notably:

  • Gambling
  • Cryptocurrency
  • Political ads

The decision is likely to receive pretty broad support. All of these have proven to be high-risk topics for media companies.

Gambling expansion has been sweeping the US. It has led to gambling ads becoming ubiquitous in traditional TV advertising, particularly during live sporting events. Nonetheless, it remains a highly divisive issue. Social media and streaming sites are dealing with ongoing controversy about how much they should involve themselves with the industry.

Political messaging has also been a hot-button topic for platforms like Twitter and Facebook. As for crypto, the crash of recent months has taken much of the wind out of the industry’s sails. However, more critical from Netflix’s perspective is the number of related enterprises whose legitimacy has been called into question. The sector remains something of a minefield while lawmakers and regulators try to figure out how to approach it.

That said, Netflix might not be gambling-free forever. After all, it wasn’t long ago that “no ads” looked like a hard line. Meanwhile, other companies have reversed similar anti-gambling stances in the past.

Facebook, for instance, once had a policy against sports betting and crypto ads. It has been starting to allow them, albeit selectively, over the past couple of years. And Google, after years of avoiding sports betting or crypto ads, changed its stance on gambling in the US in 2019. Then, last year, it began allowing ads for crypto exchanges and wallet providers.

Gambling Remains a Gamble

It must be said, however, that such pivots can have complications. In March 2022, the Australian Competition and Consumer Commission sued Facebook for crypto ads that were deemed “false, misleading or deceptive conduct by publishing scam advertisements featuring prominent Australian public figures.”

Meanwhile, in early August, the Italian communications authority fined Google for gambling ads that appeared on YouTube. Gambling ads of any kind have been illegal in Italy since 2019.

While the momentum in the US at the moment is for more permissive regulation, crackdowns are always possible. In the UK, where sports betting has a long history, sportsbook ads have recently become prohibited during matches. And as part of his recent re-election platform, London mayor Sadiq Khan proposed a ban on gambling ads in London’s subway system.

In Australia, gambling ads are prohibited during G-rated programming in timeslots when kids are likely to be watching. There are similar, serious conversations happening in Ireland, though no action as yet.

Don’t Cut Too Deep

Netflix has already tried some more traditional responses to the ongoing slowdown of its business. In recent quarters, the company has looked to capitalize on pricing power over its diehard customer base. In March, the price of a Basic plan went from $8.99 per month to $9.99. Meanwhile, Standard rose from $13.99 to $15.99, and Premium is now $19.99, up from $17.99.

That has proven effective on the top line, as Q2 2022 revenue was up 8.6% to $7.97 billion, from $7.34 billion in Q2 2021. However, operating income has taken a hit, sliding 14.6% year-over-year, $1.58 billion for Q2.

Along with price hikes, Netflix has tried to rein in the costs associated with both executive compensation and content production.

Obviously, this strategy can only go so far. At some point, there will be no more executives who are “efficiencies in waiting.”

More importantly, for a company that’s now as much content creator as delivery mechanism, the budget for creatives can only be slashed so much before it has a materially adverse effect on the underlying product. One could argue that that ship has already sailed, as the critical reception for recent Netflix originals hasn’t been glowing. Devoting fewer resources to quality content is unlikely to set things right.

Perhaps ad revenue will allow the company to invest more in content without passing the cost on to its subscribers. That’s assuming everyone isn’t too busy betting on sports to watch.

About the Author

Emile Avanessian

Emile is a one-time banker turned freelance writer. He previously worked in equity research and as a member of the Financial Sponsors Group with Goldman Sachs, where he worked on numerous casino- and gaming-related projects. His written work has focused largely on sports (NBA basketball and European soccer) and sports betting. Emile currently also writes for Squawka and Urban Pitch. His work has also been published in The Los Angeles Times, The Blizzard, Yahoo Sports, SI.com, and ESPN.

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