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As Netflix Moves Towards Ad-Tier, Licensing Issues Loom; Here’s How the Streamer Could Handle Them

Joshua Thiede

Netflix is quickly moving toward launching its advertising-supported video-on-demand (AVOD) subscription tier in early 2023. However, getting there is only half of the battle as the streaming behemoth still has to renegotiate licensing agreements with its third-party partners to allow ads to be served around certain titles. While company executives are bullish about the streaming giant’s future, Netflix’s co-CEO stated if the AVOD tier were to launch today, not everything on the site would be available, essentially locking some movies and shows behind a premium paywall.

Signs of Relief

The second quarter of 2022 was not a fantastic one for Netflix, but it was far better than it could have been. The disastrous beginning to 2022 found the streamer limping away from a 200,000 subscriber loss, its first quarterly decline since 2011. Thankfully, predictions that the service would drop another 2 million during late spring didn’t come to pass, as only 970,000 left the service during Q2.

Co-founder and co-CEO Reed Hastings attributes these numbers to events such as Season 4 of “Stranger Things,” the streamer’s hit series that has been a huge draw since its inception.

Co-CEO and chief content officer Ted Sarandos doesn’t seem to have the same enthusiasm as his partner, at least in terms of available content. The streamer is already losing a good chunk of its library as some existing licenses are expiring, and during a video interview with analysts following the Tuesday release of the second quarter earnings report, Sarandos indicated that — if the option launched today — not all of the service’s remaining third-party content would be available on the AVOD pricing tier.

Though currently renegotiating the problem with its partners, Sarandos hinted that there very well might always be some content that won’t appear to commercial-watching customers.

“The vast majority of what people watch on Netflix, we can include in the ad-supported tier,” Sarandos said. If we launched the product today, the members in the [AVOD tier], would have a great experience. And we will clear some additional content, but certainly not all of it.”

License to Shill

Netflix stands to win big from its AVOD option. Some recent studies have shown the service making gains of upwards of $1.2 billion by 2025, while others predict an ad revenue peak nearly four times that amount. However, those figures only work out if Netflix actually has something to show its customers.

Ads appearing on all of the streamer’s original content will essentially be money in the bank, but while “Stranger Things,” “Bridgerton,” “Ozark,” and other Netflix Originals get most of the media attention, licensed content has been the backbone of the service since it launched as a DVD-by-mail service a quarter century ago. Therefore, since Netflix doesn’t have permission to run commercials alongside some of its third-party offerings just yet, it very well might limit the number of people willing to sign up for the lower-priced service.

Another possible meaning behind Sarando’s somewhat cryptic statements is a scaling paywall. One way that Netflix may incorporate its AVOD strategy with its current subscription lineup is by intentionally holding some of its content back, keeping their more profitable offerings cut off from an AVOD tier entirely. While keeping customers away from content doesn’t sound like Netflix’s MO, it would solve any licensing issues as its customers would expect there to be a disparity between tiers.

This would also give the streamer the ability to cater to specific segments of the streaming population. If there are customers who are only interested in subscribing for the service’s library of familiar and nostalgic content, but are uninterested in Netflix Originals, the company could create a tier that only includes access to licensed titles. Netflix executives have said that they plan on keeping their subscription options simple moving forward, so this might not be in the cards, but it might be a way for the streamer to encourage a new demographic of customers to sign up.

Mimicking the Mouse

Taking cues from others in the streaming industry, Netflix could take a page out of the Disney+ playbook as well. Since launching the streaming service, Disney has experimented with releasing titles on the platform for an additional fee. While the “Black Widowrelease in 2021 was a mess for the House of Mouse, other offerings including “Turning Red” have had problem-free distributions.

Hastings stated that the company would take a relatively more conservative approach to its content budget in the coming years, capping content spending at $17 billion for the next year or so. Not only could Netflix use this pay-per-view-like strategy for their originals on an AVOD tier, but they could also incorporate some of their licensed content. This might be a roundabout way of skirting third-party agreements so the streamer can still boast a large library for its ad-watching audience while offering back-door access to higher subscription service offerings. Such a move would make its AVOD plans akin to Prime Video, an industry leader that Netflix might not mind being compared to.

Though things appear to be in motion, Netflix still has a lot to figure out when it comes to its AVOD service. While a new partnership with Microsoft will help bring their lower-priced subscription option to the masses by early next year, Netflix still has some time to get all of its licensing ducks in a row. No matter how the streamer plans to handle ads on its services, subscribers won’t stand for a service — known for its cadre of content — suffering from dwindling access to its third-party library.

Netflix

Netflix is a subscription video streaming service that includes on-demand access to 3,000+ movies, 2,000+ TV Shows, and Netflix Originals like Stranger Things, Squid Game, The Crown, Tiger King, and Bridgerton. They are constantly adding new shows and movies. Some of their Academy Award-winning exclusives include Roma, Marriage Story, Mank, and Ma Rainey’s Black Bottom.

Netflix offers four plans — on 1 device in SD with their “Basic with Ads” ($6.99) plan, on 1 device in SD with their “Basic” ($9.99) plan, on 2 devices in HD with their “Standard” ($15.49) plan, and 4 devices in up to 4K on their “Premium” ($19.99) plan.

Netflix spends more money on content than any other streaming service meaning that you get more value for the monthly fee.

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