Netflix Inc.’s kids programming and new movies will stay commercial free when the company introduces its advertising-supported service, according to people familiar with the plans.
Netflix has told partners it won’t run ads during original kids programs, said the people, who asked not to be identified because the company is still working out the details. In addition, some studios that have licensed Netflix the rights to kids programs won’t allow the company to run commercials in them. The company has decided original movies should stay ad-free, at least at first, the people said, which should allay the concerns of top filmmakers.
Netflix is still finalizing plans for its advertising-supported service, which means details and strategies could still change. The company aims to introduce the ad tier early next year. Netflix declined to comment on its plans beyond saying that it is still in the early stages of figuring out the advertising business.
The new tier will cost less than the current service and is part of a plan to make Netflix more attractive to cost-conscious consumers. The company lost subscribers in the first six month of the year and needs to start adding customers again to reverse a roughly 65% decline in its stock price since late November. More than 220 million people pay for Netflix, and hundreds of millions more use it either because they are relatives of a subscriber or share the log-in from a friend or acquaintance.
Analysts estimate Netflix could generate $3 billion to $4 billion a year in ad sales. That would make it one of the biggest players in online video advertising. Netflix won’t insert ads into its existing service.
While Netflix can insert commercials into programs that it owns, it doesn’t have the rights to do so for its entire catalog because it licenses thousands of titles from outside studios. Many of those deals don’t include the rights to offer programs in an ad-supported environment, forcing Netflix to go back and pay extra. The company is now negotiating for the rights with companies such as Sony Group Corp., Paramount Global and Warner Bros. Discovery Inc. Netflix will pay between 10% and 15% of the current value of the deals to secure the rights, said two of the people.
Some of those partners won’t allow ads during select programs, though Netflix could still run spots before or after some of them. Netflix co-Chief Executive Officer Ted Sarandos has already said the company won’t offer every show from its current service on the ad version.
Walt Disney Co., Netflix’s biggest competitor in paid-video streaming, is also working on an ad-supported version of its flagship service, Disney+. Hulu, majority owned by Disney, already has a version with commercials.
Both Disney and Netflix plan to show fewer ads online than viewers see on live TV or in most streaming services. They also hope to charge higher prices than the industry standard. Disney is more reliant on kids programming than Netflix.
Children’s programming presents a particular challenge when it comes to advertising. Google and YouTube had to pay $170 million for violating kids privacy laws. Netflix will show kids programs in its news service without the commercials and could, at some point down the line, decide to introduce ads.
Movies present a different challenge. Most filmmakers don’t want to make a movie that debuts with ads interrupting the story. Movie theaters run spots before new movies but not during them.
Netflix can still generate plenty of money without showing ads in the majority of its programming, according to industry experts. The company has a large pool of potential viewers and is known for having high-quality programs, such as “Stranger Things,” “Bridgerton” and “Squid Game.” HBO Max doesn’t show ads during any HBO programs, including series such as “Game of Thrones” and “The Sopranos” that were originally released without commercial breaks. Netflix may go back and insert ad breaks into some of its original series that have previously appeared without such interruptions.
Microsoft Corp. will handle the technology and sales for advertising in Netflix, at least initially. If it grows into a large enough business, Netflix will likely build its own ads-sales operation. The company is already looking to hire salespeople and an executive to lead its advertising-supported service. Bloomberg