Netflix to Hollywood: We don’t need your content for our ad-supported plan

Netflix is playing the long game on ads

Netflix shared a few more details about its advertising plans this week, including a somewhat vague deadline: The company wants to launch an ad-supported streaming tier “ around the early part of 2023 ,” it said in its Q2 letter to investors Tuesday.

Executives still kept mum on some key details, including how much consumers will have to pay to watch Netflix with ads. However, during Tuesday’s earnings call, they laid out the company’s strategy in broad strokes, stressing that this was not a quick Band-Aid, but a multiyear plan meant to evolve over time.

• Netflix will launch an ad-supported tier in just a few markets first and then expand it over time to its global footprint.
• Executives didn’t spell out which countries they were eyeing for the launch, but Netflix Chief Product and Operating Officer Greg Peters did narrow it down a bit. “We’re launching first in the countries that have more-mature ad markets,” he said.
• Netflix announced an ad partnership with Microsoft last week. On Tuesday, Peters confirmed that Microsoft will sell all of the ads running on the service. “That’s an exclusive arrangement with them,” he said.
• The look and feel of the ad-supported tier is likely going to change over time. “We are taking an iterative approach, the crawl-walk-run model. At the beginning, it will look [like] what you are familiar with,” Peters said.
• “Over a couple of years, we can deliver an experience that is fundamentally different from linear in a way that supports all of the stakeholders,” he added.

One big revelation: The ad tier will have a smaller catalog. There have been reports that some of the studios were asking for Netflix to pay a significant premium to include their licensed content in the company’s ad-supported tier.

• Netflix execs very publicly pushed back against those demands Tuesday, effectively telling content partners they didn’t really need their shows and movies all that much, thanks to the company’s large and growing number of originals.
• “The vast majority of what people watch on Netflix, we can include in the ad-supported tier today,” co-CEO Ted Sarandos said. “There’s some things that [we wouldn't], that we are in conversations with the studios on. But if we launched the product today, members in the ad tier would have a great experience.”
• Sarandos clearly expects that some movies or shows won’t be included in the ad-supported tier. “We will clear some additional content, but certainly not all of it,” he said. “But I don’t think it’s a material hold-back to the business.”
• Negotiating in public is not a new tactic for Hollywood (just ask the TV networks about carriage disputes), but Netflix execs apparently also wanted to send a signal to investors worried about spiraling costs.
• “It’s certainly a nice-to-have, but it’s not a must-have,” CFO Spencer Neumann said about some of that third-party content. “We can launch today without any additional content clearance rights. Hopefully we can supplement that, but we will be disciplined in what we do.”

We got some vague hints about pricing. Peters and his colleagues also made sure to tell investors that there’s no risk of cannibalization, even if some existing members decide to switch to the cheaper tier.

• Effectively, Netflix wants to make up the difference with ad revenue. “We are quite optimistic that the unit economics work to make that monetization equal or maybe even better than what we can see on the comparable side for the non-ad, subscription-only plans,” Peters said.
• There’s some precedent for this. Hulu has for years made as much money with its ad-supported plan (which is $6.99 per month) as with its ad-free version ( $12.99 per month).
• Working backwards from those numbers, one could imagine that Netflix may launch an ad-supported plan for roughly $5 to $6 below some of its current plans.
• Netflix’s cheapest current plan is $9.99 per month, while its most popular plan is $15.49. The company’s average revenue per membership was $15.95 in North America in Q2, while it was $11.17 in Europe. If I had to bet, I’d imagine Netflix was aiming for a $6.99 or $7.49 price tag.
• Or maybe the company will even offer multiple options. Asked point-blank whether there would be just one ad-supported plan, Peters delivered a remarkable non-answer, calling ads “one of the dimensions that will inform our plan structure” while also admitting that future pricing will be more complicated than the current good-better-best approach. “We will have more discrimination features,” he said. Glad we cleared that up!

Don’t expect ads to solve all of Netflix’s problems. The company is playing the long game on ad-supported video, and executives told investors that they shouldn’t expect huge returns right away.

• “It’s a slower build, over multiple years, to have a material impact on our business,” Neuman admitted.
• That’s probably not what investors wanted to hear from a company whose growth has come to a screeching halt, but Netflix execs believe they do have a remedy for those near-term worries as well: They want to begin monetizing account sharing next year, too.
• Charging Netflix subscribers a premium if they want to share their account with friends and family members will have “a more near-term impact” on the company’s bottom line, Neumann promised.
• Netflix estimates that 100 million households watch Netflix without paying for it. In early tests, it is charging around $3 extra per shared account.

The message here is clear: Ads are a long-term opportunity — and Netflix will look for other ways to generate some extra cash until the ad business is fully up and running.

— Janko Roettgers

Disclosure: Protocol is owned by Axel Springer, whose chairman and chief executive officer, Mathias Döpfner, is on the board of Netflix.

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Voice interoperability is becoming a thing

This week, Amazon announced a whole bunch of updates for its Alexa assistant as part of its annual Alexa Live developer conference. Somewhat buried in the updates was the news that the company will begin to roll out Universal Device Commands over the next year, which will make it easier to use multiple assistants running simultaneously on the same device.

• Universal Device Commands will unlock core functionality like controlling a smart speaker’s volume, pausing playback and stopping an alarm or timer across multiple assistants.
• Think of these as core features of a smart speaker or device, if you will. They should just work, regardless of whether you access them with Alexa or another assistant.
• “Imagine a customer has a Sonos device, and they start a music stream with the Sonos Voice assistant,” Alexa Voice Service VP Aaron Rubenson told me recently. “If somebody else comes into the room an hour later and says ‘Alexa, stop,’ you would like the music to stop.”
• All of this is done in a privacy-friendly fashion, according to Rubenson. “When audio is streaming, the Universal Device Command framework will make it known to any assistant that there is audio playing,” he said. “But other than the assistant that started it, the other assistant won't know what is playing, or which app it's playing in.”

Amazon’s multi-assistant strategy is a big deal. Two assistants being able to stop the same radio stream may sound trivial, but it’s part of making Amazon’s vision of ambient computing work. That vision includes Alexa, third-party assistants like the one made by Sonos and white-labeled versions of Alexa all working together.

• This allows third-party device-makers to build custom assistants and voice experiences, while also including Alexa as a general-purpose assistant.
• Amazon is effectively positioning itself to consumer electronics companies as a friendlier player than Google, which has long insisted that devices can’t run other assistants in conjunction with the Google Assistant.
• The competition with Google is about real money, for Amazon and device-makers alike. Amazon hasn’t said how big its Alexa business is, but it is clearly growing.
• We have skill developers making seven figures,” Rubenson told me, adding: “Alexa implementations have contributed to literally billions of dollars of consumer electronic sales.”

— Janko Roettgers

A version of this story first appeared on Protocol.com .

In other news

Discord lands on Xbox. The PC voice chat platform is finally available on Xbox consoles , helping bridge the gap for cross-platform games. Sony invested in Discord last year to do the same, but PlayStation fans are still waiting for the feature to launch.

Google starts testing its AR glasses. The company will test an AR prototype device capable of transcribing spoken word in real time in the wild. Tests will only include “a few dozen Googlers and select trusted testers.”

FaZe Clan goes public. The gaming lifestyle and esports brand FaZe Clan went public on the Nasdaq on Wednesday by way of a SPAC merger valuing the firm at $725 million.

Meta sues Meta. A small installation-art company is suing the social media and metaverse giant over naming rights. If there only was a word to describe this whole situation …

Another Activision Blizzard union. Quality assurance testers at Blizzard Albany, a studio formerly known as Vicarious Visions, have formed a new union with the CWA and filed for a NLRB election, following in the footsteps of QA workers at Raven Software.

LG has high hopes for webOS. The company hopes that it can license its webOS-based smart TV platform to 200 TV-makers .

Meta is deemphasizing its news tab. The company is reportedly moving people over to work on creator economy tools.

YouTube teams up with Shopify. Speaking of creator economy: YouTubers will soon be able to sell stuff from their Shopify stores directly on YouTube.

This newsletter is brought to you by a guy with a hose

It’s been a hot week! Heat waves have impacted large parts of the U.S. and Europe, which has started to have an effect on internet infrastructure: Google’s and Oracle’s U.K. data centers were both brought down by “cooling-related failures” Tuesday. Didn’t notice any outages? Then you can thank a very low-tech remedy: European data center operators have been placing some of their employees on their roofs to spray down their AC units, according to Bloomberg . So if you are busy tweeting, snapchatting or watching Netflix during the next heat wave, spare a few moments to think of the poor sap who is baking on top of a roof, hose in hand, to keep things cool for the rest of us.

— Janko Roettgers

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