Netflix partnerships could become more attractive to marketers in a down economy, analysts predict

Key Points
  • A new report from Forrester Research predicts that marketers will double their spend on marketing partnerships with Netflix, like product placement and "other creative marketing integrations with brands."
  • This will come as marketers increasingly seek more natural and less intrusive ways to reach consumers, instead of bombarding them with traditional ads.
  • Netflix steadfastly denies that it looks to paid product placement in shows as an important current or future source of revenue.
CEO Of Netflix, Reed Hastings, attends the red carpet during the Netflix presentation party at the Invernadero del Palacio de Cristal de la Arganzuela on April 4, 2019 in Madrid, Spain.
Juan Naharro Gimenez | Getty Images

As marketers come up against economic uncertainty in 2020, they will increasingly turn to Netflix to help get their messages to consumers, according to Forrester Research. In a report shared with CNBC Tuesday, the firm predicts that marketers will double the amount of money spent for product placement or other creative marketing integrations with Netflix.

Although the analysts expect Netflix to remain ad-free in the traditional sense, they predict the company will "redefine advertising opportunity by doubling its investment in product placement and other creative marketing integrations with brands." This would be one way of connecting with consumers in a memorable way "without the creepy personalization and annoying disruption plaguing today's ads."

Advertising insiders have often predicted that Netflix will eventually start showing ads, but the company has steadfastly insisted they're wrong — in response to execs speculating on Netflix's advertising plans at Cannes Lions, Netflix called comments "wishful thinking from an advertising conference." Showing ads could deflect subscriber growth: A study earlier this year found 23% of respondents would definitely or likely drop their Netflix subscriptions if the service added advertising at its current price point or a dollar cheaper.

A Netflix spokesperson said the prediction is inaccurate and that it's not doubling its investment in the space, whether financially or in team size. The company said just because a brand is shown on a Netflix show doesn't mean it has been paid, and said it's rarely paid for these placements.

But Jim Nail, principal analyst for B2C Marketing at Forrester, believes marketers will keep knocking on Netflix's door, as audiences are increasingly turning away from traditional TV.

"We know these people aren't ... meditating or playing with their kids. They're watching stuff, they just happen to not be watching traditional television," he said.

"The product placement stuff is a nice way for them to tap into some of that revenue without risking the customer relationship in the way that announcing an ad-supported option might," Nail said.

An arm's length relationship

Although product placement is all over Netflix, the company says that a lot of the placement is driven by show creators rather than Netflix, and that brands seldom pay Netflix directly for placement.

Forrester points to an estimated $15 million worth of product visibility from brands like Burger King and Coca-Cola in the third season of "Stranger Things," but Netflix said at the time there was no "official" product placement in that season and said that "none of the brands and products that appear in 'Stranger Things 3' were paid for or placed by third parties." Netflix reiterated to CNBC that brands appearing in "Stranger Things" were written into the script for storytelling authenticity and not product placement. 

For a scene in the second season of Netflix's "Stranger Things" in which the characters are eating chicken from KFC, Netflix told CNBC earlier this year that it did not receive payment for that particular placement, but said the company does occasionally take payment for placing products in shows. A spokesperson for KFC confirmed it paid a third party, Branded Entertainment Network, which helped facilitate the deal.

Netflix also appears to be beefing up the team behind its marketing partnerships, Cheddar reported earlier this year.

Netflix still characterizes the practice as more of a product builder than a moneymaker. In the company's second-quarter earnings call, an analyst asked whether product placement would become a monetizable part of the business at some point.

Netflix CEO Reed Hastings said the company was monetizing the practice "in more membership growth. The focus is to get more people excited about Stranger Things ... the core focus is create all these merchandising opportunities, tie-ins, touch points so that you feel the Stranger Things energy so that more people join. So together, as we do monetize all that, it's just we're monetizing it through our giant engine rather than through little sidecar vehicles."

Chief Content Officer Ted Sarandos added that the company wanted investors to think about product partnerships "as a character in the film."

A spokesperson reiterated that product partnerships are not a replacement for paid advertising, but rather are a way for Netflix to engage with and entertain fans off the service and in the real world.

Even so, the Forrester analysts believe it will become a very real part of the company's business as Netflix is reaching saturation among U.S. households with the disposable income to spend on the platform.

Not to mention the new competition in town.

"With Disney going live with their streaming service, Netflix is standing to lose a lot of subscribers and a lot of licensing of content," said Tina Moffett, a senior analyst of B2C Marketing at Forrester. "This is a very real avenue that they need to explore."

Other predictions

Beyond the Netflix prediction for 2020, Forrester also thinks brands will continue to shift budget to influencers and acquire direct-to-consumer companies as marketers seek to reach consumers who are increasingly ignoring traditional ads, among other trends.

"The looming economic downturn, a slight decline in consumer confidence in August and in September, data and privacy regulatory uncertainty, and a pending US election will put stress on marketers to spend wisely across initiatives that drive customers and business growth," the report says. "Yet consumers' expectations will continue to grow in the areas of convenience, quality, trust and authenticity."

Specifically, Forrester predicts in the report that marketers will shift 10% more budget toward influencer marketing away from agency content creation fees. This move would comes as influencers provide a lower-cost and "high-authenticity" alternative to traditional advertising, analysts said.

They also expect several "stalled legacy brands" to acquire direct-to-consumer companies to modernize their marketing efforts.

"Legacy brands facing an economic downturn will be attracted to DTC brands' marketing prowess: stellar targeting and acquisition, values-based brand positioning, and superior marketing analytics," analysts wrote in the report.

Forrester also believes marketers will increasingly turn to "marketing resource management" technology to streamline marketing operations and costs and see how those efforts are performing in real-time, and seek B Corp status as public-benefit companies -- as Athleta and Danone North America have done -- to vie for consumer loyalty and express stronger corporate values.

Some FAANG stocks could still rise up to 15%: Wedbush Securities
Some FAANG stocks could still rise up to 15%: Wedbush Securities