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Netflix tests ads between episodes: Just a test or are they here to stay?

Though binge-watching is practically synonymous with Netflix, Nickelodeon actually pioneered the concept with Route 66 marathons on Nick at Nite more than 30 years ago. Netflix redefined it by releasing the entire first season of House of Cards at once. The platforms’ original series are designed to binge and for the first time, Netflix is running ads between episodes.

It’s a big move because Netflix has repeatedly pledged to keep the platform ad-free. However, there’s a lot of gray area.

For one, the promises were about third-party advertisers; Netflix is promoting its own content. They’re in between episodes, as opposed to proper commercial breaks. Many users weren’t happy about seeing ads, but they can skip them or even opt out if they’re so inclined.

The ratio of 30 seconds of advertising to an hour of content doesn’t sound like much. But Harry Kargman, CEO of mobile ad network Kargo, points out that many subscribers view advertising as somewhat of a betrayal, given the way people use the platform.

“Watching three hour-long episodes one after another almost feels like a cinematic event,” he says. “If you’re in the middle of a movie and there’s suddenly an ad, you’d be furious.”

Netflix also says these ads are just a test, noting that most tests don’t end up being implemented. Could advertising become a permanent fixture?

Introducing old customers to new content

Last month’s Emmy Awards highlights just how much Netflix has revolutionized the television experience. The streaming giant received 112 nominations, marking the first time anyone has beaten HBO in 17 years. Still, Kargman believes Netflix took a page from the broadcast media playbook.

Netflix Emmys

“Networks take major sporting events and award shows, and use them to garner a massive audience to effectively promote other shows they want people to tune into,” he says. “They want to create a weekly audience that’s hooked into their series, creating more revenue after, say, the Olympics are over.”

Few companies have mastered personalization like Netflix, whose sophisticated algorithms customize every aspect of the user experience right down to the thumbnails. The company views these ads as an extension of that personalization.

“Our sort of Holy Grail dream is that the service was so good at promoting the new content in such relevant ways that we wouldn’t have to spend externally,” CEO Reed Hastings said on an earnings video in January.

When it comes to data, Netflix has a huge advantage over traditional broadcasters. Everything happens within the company’s own ecosystem, which provides much greater insight about what someone is likely to watch. If the ads are personalized well enough—and you know they probably will be—Netflix can introduce people to more shows, ensuring extra viewership.

The Handmaid's Tale

The Handmaid’s Tale has been a catalyst of Hulu’s growth because people kept hearing about it and wanted to see what all the brouhaha was about. But the challenge is, once people finish watching and the fascination ends, the service is vulnerable to cancellations,” says Kargman. “These platforms can use existing series to lead you into new series, making them a must-have in your life.”

Will Netflix open up to third-party advertisers?

Kargman doesn’t believe these Netflix ads will cause an exodus from the platform, no matter the anger on social media. Nor does he believe it’s a move toward a more advertising-based business model.

Michael Connolly, CEO of ad-tech developer Sonobi, isn’t so sure.

“When Netflix’s growth levels off, what is the revenue model to grow?” he says. “They’re starting to plant the seeds now because whether users like it or not, Netflix has growth goals. You don’t have to be a statistician to see that they can’t hit them on subscription revenue alone.”

Today, there are 130 million subscribers worldwide, not counting all those people who use their old roommate’s mom’s account. Its most recent growth missed Wall Street’s expectations by about half a million subscribers.

Netflix subscriber growth

Despite Netflix’s aversion to outside advertisers, introducing them to the platform could lead to an alternative explosion in revenue. In a state of digital marketing report four years ago, GroupM predicted that a single pre-roll ad before a Netflix show would eventually become a highly-desirable ad unit. Should that happen, Connolly thinks Netflix could set new tone for the entire streaming landscape.

“When you see big leaders in a space set this type of standard, it allows second-movers to avoid the challenge,” he says. “Netflix has already done the hard work.”

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