It was really only a matter of time before Netflix (Nasdaq: NFLX ) hopped on the online advertising bandwagon. With nearly five million sets of the Internet's most desirable eyeballs -- those with a predisposition to spend money online -- it was a slam dunk waiting to happen.
This week, the company is launching banner-sized ads throughout its site. Sony (NYSE: SNE ) is the first sponsor, with exclusive ownership of the juicy real estate for three days as it pitches its upcoming Monster House theatrical release. Is Sony jumping the gun here? After all, the movie is still five weeks away from hitting the big screen, and it'll be a few months after that before the DVD hits retail.
Not really. The ad links to the Sony Pictures' interactive site for the edgy computer-animated summertime flick. It's more about building up expectations than loading up Netflix queues.
Sony's ads feel out of place against the rich red Netflix page layout, but that's probably because Netflix has guarded its pristine user experience for too long. But this isn't the company's first foray into playing carnival barker for the motion picture industry. There were gradual inroads into marketing new releases. It went with green mailers for Shrek 2, and Garfield invaded the signature mailers before the perpetually hungry cat made his film debut.
Netflix can be a master marketer
Netflix has also taken advantage of subscriber ratings as a prelude to a pimp. The day before DreamWorks Animation's (NYSE: DWA ) Over the Hedge began its multiplex run last month, Netflix gave me a heads-up to the new feature's release based on the fact that I had rated Monsters, Inc. so highly.
Wow. Talk about the perfect shoehorn. The same user ratings tool that has delivered timely recommendations in the past is now being used as a source for targeted sponsorship. Netflix has the luxury of 4.9 million subscribers disclosing their celluloid likes and dislikes, and now Netflix is gearing up to cash in on that relationship. It's pitched ideal rental picks in the past. Now it's likely to get paid to pitch ideal theatrical films and products, too.
Yes, products. Hollywood isn't the only one hungry for the attention of film buffs. By this time next year, don't be surprised if you see a Harley-Davidson (NYSE: HDI ) ad show up the moment Easy Rider gets clicked into your DVD rental queue. Even better, you decide to rent Supersize Me or Fast Food Nation in a few years, and you get an ad from McDonald's (NYSE: MCD ) to present its side of the story. It's got to happen. Just you wait.
This takes us back to last summer's hire of Peggy Fry, who came over from America Online to head up the company's new online ad sales division. It was a brilliant move, even if it had CEO Reed Hastings eating a little crow.
Two years earlier, we asked him about the possibility of further monetizing his growing user base by selling ads, and he seemed adamantly against it. He compared the decision to keep its red mailers pure to that of Starbucks (Nasdaq: SBUX ) keeping its nose out of marketing
"We have got a very clean brand," he said at the time. "We have got a brand that really represents something special and we don't intend to expand into advertising, no matter what the associated revenues, and it is really focused on, again, creating this pureness and this great brand. We think that is the right strategy to build the most valuable company."
Let's not be too quick to hit Skip over the head with his own words. First of all, Starbucks has also backed down on that front. Just check out the java king's role in promoting Akeelah and the Bee. Then we have the inescapable truth that it makes too much sense for Netflix to do exactly what it's doing right now. Do you really think that churn will spike as a result of timely banner ads showing up throughout the site?
Reeling in the profits
I would take this one step further and really turn up the ad-generating revenue by plugging in contextual ads by Google (Nasdaq: GOOG ) , or any of the other leading providers, to serve up perfect text ad blocks until Netflix builds up its inventory of direct sponsors who are willing to pay more for the virtual real estate.
That's the key. Advertising is a model based on traffic, and a more aggressive push in this direction would help turn the company's largest liability -- those users going through more than 6-8 titles a month -- into a captive audience that can help offset the fulfillment costs.
Can it backfire? Of course. Maybe ad-wary members may give up providing ratings based on the company's five-star grid. Maybe the competition will catch on and cash in by marketing itself as an "ad-free" service. The risks seem mostly negligible at this time, though.
Netflix has always known how to command an audience. Now it's a matter of learning to shake those moneymakers.
Longtime Fool contributor Rick Munarriz is a Netflix shareholder and plans to stay that way. He has been a subscriber and investor since 2002. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.