- Ad chiefs at NBCUniversal and Hulu acknowledge Netflix will likely incorporate advertisements eventually.
- Netflix has already experimented with some product placement and could integrate ads in nontraditional ways.
- Netflix has long said it wouldn't include ads in its service.
Rising programming costs and the potential for billions in additional revenue could be too hard for Netflix to pass up, predicted NBCUniversal's ad chief Linda Yaccarino and Peter Naylor, Hulu's head of ad sales, at a Cannes Lions panel Wednesday moderated by The Trade Desk founder and CEO Jeff Green.
"When you have to make more programming that's not guaranteed to be a hit, you have to spend more money, you have to build your brand, you have to help the consumer discover your stuff — the price will go up for the subscription, and it would be logical to mitigate those increases to take ads," said Yaccarino, chairwoman of advertising sales and client partnerships at NBCUniversal, parent company of CNBC.
Just how an ad-supported Netflix might look is unknown. Theoretically, Netflix could borrow a page from the playbook of Hulu (and soon AT&T's WarnerMedia) and offer a version of its subscription-based service for a discount with ads. Or Netflix could copy the Spotify model and have a free version with ads as opposed to a subscription service that may come with additional benefits.
A Netflix spokesperson said this was "wishful thinking from an advertising conference." Incorporating ads isn't a topic the company is currently focused on, according to a person familiar with the matter.
It's also possible Netflix could incorporate ads in a way that doesn't mirror the traditional model of TV commercials. Netflix has already experimented with marketing partnerships, such as Coca-Cola's New Coke rerelease on its hit show "Stranger Things," and product placements in other shows. Future integration of advertising is likely to come in new ways that haven't been created yet, said Naylor.
"The future of ad-supported media does not resemble what we're doing today in terms of ad load or even ad shape," Naylor said. "It can be interactive advertising or nonintrusive advertising. I think you're going to see a lot of innovation from all of these new OTT providers because we're allowed to. We're not married to the clock. Fifteen and 30-second ads were a product of linear TV. When everything's on demand and served through an IP address, the ad experience is going to dramatically improve."
Roughly 70% of Hulu subscribers buy its cheaper $5.99 per month ad-supported product, said Naylor. For those who don't want any ads, Hulu also offers an $11.99 per month version.
That would give brands the ability to reach huge swaths of the population and give Netflix a new revenue stream and investor story if subscription growth peters out and content costs continue to increase. Netflix spent $12 billion on content in 2018 and risks losing shows, such as "The Office" and "Friends," that are only licensed for a set amount of time. NBCUniversal spent more than $28 billion developing and acquiring content last year, Yaccarino said, suggesting Netflix will have to continue to increase its spending to compete with other media companies.
The comments from Hulu and NBC echo other comments from executives at YouTube and J.P. Morgan in April, who also thought Netflix would ultimately warm to advertising.
Disclosure: Comcast's NBCUniversal is the parent company of CNBC.