COMMENT:

News broke internationally this week that Netflix has started playing promos for its original programming, between episodes of shows being watched by subscribers.

The move triggered an immediate reaction from users, who saw it as the first sign of the famously ad-free service dipping its pinky toe into promotional waters.

But ad-hating Kiwi viewers, whose gag reflex is triggered by a shot of condensation clinging to a Coke can, don't have to fret just yet.

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Netflix assured the Herald this week that the promos are only one of many global experiments aimed at improving its service, and that the company doesn't plan to go full Don Draper and start implementing brand ads on its platform.

"In this particular case, we are testing whether surfacing recommendations between episodes helps members discover stories they will enjoy faster," a spokesman said in an email.

"It's important to note that a member is able to skip a video preview at any time if they're not interested."

That last point is important because it employs a behaviour that consumers have grown used to elsewhere on the internet, most notably on YouTube, where viewers often have to hit the skip button to avoid seeing an ad.

YouTube also offers another lesson — that users do eventually come to accept advertising despite initial misgivings.

In 2007, the first YouTube ads debuted to the expected outrage, with users threatening to abandon the service.

Unsurprisingly, that didn't happen. The content was simply too good, the levels of FOMO (fear of missing out) too high, and consumers have continued grumbling their way back to the site.

The point is that as long as Netflix keeps delivering the best shows around, users will be able to tolerate lifting their fingers every 48 minutes to hit the skip button — or perhaps, do what they've always done and use the ad break as an opportunity to rush to the bathroom.

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Commercial pressure

An important difference between Netflix and its ad-funded counterparts in the tech world is that users pay a subscription to stream shows, in the expectation that they won't have to watch any ads.

That expectation has been forged by digital companies such as Netflix and Spotify, and certainly didn't apply in previous years to Sky TV and international cable companies, which have always used a mixed revenue model, supplementing subscriber income with limited advertising.

While Netflix has kept the advertising door firmly shut until now, the company will eventually have to find additional revenue somewhere.

Netflix financial figures show that its long-term debt has grown from US$2.4 billion in 2016 to US$8.3b this year.

The only reason that this hasn't caused investors to flee is because of the company's exponential customer growth over that period. That can only last for so long, and eventually, investor attention turns to the profits a business can deliver.

To quote outgoing Sky CEO John Fellet, "profitability doesn't matter until it does matter".

For Netflix, that tipping point doesn't seem far off. Quarterly results released last month saw the company miss its growth target by more than 1 million subscribers.

The goal of adding more than 6 million customers in three months was perhaps a little ambitious, but the company is clearly no longer growing as quickly as expected.

Each of those missed customers signifies unearned revenue, and as subscriber growth continues to drop off in coming years, the company will have a few choices: introduce ads, push up prices or offer less content.

Also, with Netflix facing increased competition — some of it from big ad-funded players like YouTube — the cost of securing the best online content looks likely to increase in the coming years, as bidding wars become more intense.

Paying only $15 a month for a virtually unlimited stockpile of ad-free content has always seemed a little too good to be true — because it is.

As content prices increase and subscriber growth subsides, something eventually has to give. Ultimately, customers have to decide whether they're willing to tolerate ads or higher prices.

In a way, ads might be the only thing capable of saving viewers from the high prices we previously had to pay for this kind of content.

Building brands

During a recent flying visit to New Zealand to speak at TVNZ, advertising effectiveness gurus Peter Field and Les Binet spoke about the challenges businesses have faced in building brands online.

Part of the difficulty comes because audiences have become fragmented across digital channels, which has led to businesses using highly targeted ads to reach key demographics.

The problem is that these highly targeted ads don't build brands in the same way that a prime-time TV ad used to. That means brands don't get entrenched into the Kiwi psyche on an emotional level, so they're easily forgotten. The fame previously built in living rooms is lost to some degree.

"One of the most dangerous beliefs out there at the moment is that the power of data trumps the power of brands, but our research in fact shows that the opposite is true," says Field.

"The digital space and the world within which people are competing with each other is viciously crowded and widely competitive and in that kind of environment, if you haven't got a powerful brand you're stuffed."

The type of brand-building Field and Binet refer to has become more difficult with consumers — particularly those on the younger side — increasingly locked behind an ad-free paywall at the very times when the family used to sit together and watch free-to-air TV.

If Netflix were to open the door to perhaps only high-quality brand ads focusing on storytelling (think Lotto or Mercury), Kiwi businesses could hit key audiences across free-to-air and subscription video on demand at the same time.

David Thomason, the head of strategy at FCB, didn't hesitate when asked whether he thought advertisers would be interested in using Netflix to reach Kiwis.

"Hell yeah," he shot back.

"If you set aside the aspect of Netflix's customer experience and look at it from the perspective of a business advertising, then this would be a great opportunity."

Thomason points out that Netflix offers a highly engaged environment, where Kiwi users spend hours every day, making it a good place to build brands.

He does, however, question the skip button, saying this could reduce the appeal for businesses looking to build their brands.

"If ads are skippable, it might just become habit, and you'd have to question the value of it."

This is all a bit speculative at this stage, but we might as well enjoy our cheap, ad-free viewing experiences while we can because we might one day look back at these as the good old days.

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