Why Netflix Will Never Run Video Ads

Netflix (NASDAQ: NFLX  ) used to run advertising across some of its properties. The site itself had some ad banners early on, and those red mailers included third-party messages for years. Watch this movie, buy this DVD player -- you know the drill. So the company has played the advertising game before, although it's been a while since the idea was deep-sixed.

But I've never seen advertising attached to the streaming video content.

Some people are suggesting that Netflix should grab low-hanging revenue by doing exactly that. The idea sounds wonderfully simple: Include 15 or 30 seconds of ad space before each video, watch consumers complain but still stick with the service, and build a swimming pool to hold all the extra money coming in.

This will never happen. Not under current management, at least. And here's why.

Netflix doesn't offer the biggest selection of digital entertainment, nor the freshest. Apple (NASDAQ: AAPL  ) and Amazon.com (NASDAQ: AMZN  ) will happily sell you a ton of movies and TV episodes that just don't exist in the streaming Netflix universe. But iTunes and Amazon Instant Video can't match the customer-friendly convenience of Netflix. So people are perfectly happy to pay Netflix a reasonable monthly fee for a content library that is large but not massive, good but not mind-blowingly great.

Why? Because Netflix has mastered the art of convenience. CEO Reed Hastings knows that it's a vital part of his successful formula, and he simply can't afford to throw that business advantage away.

And that's exactly what would happen if Netflix inserted ad space in digital videos. If you want that commercialized experience, you go to Hulu Plus, where monthly fees go to meet a ton of commercials.

How successful is that approach? Hulu just announced that they've reached 3 million Hulu Plus subscribers in two years. Netflix added that many in the first quarter alone, and sports 30 million total subscribers. Hulu backers Walt Disney (NYSE: DIS  ) and News Corp. (NASDAQ: FOX  ) are reportedly at loggerheads over what to do with the unremarkable service: Disney wants more ads and no subscription fees while News Corp. wants the exact opposite -- no ads, just subscription plans.

It's pretty clear that the double-dipping approach isn't making anybody happy. Netflix has absolutely no reason to go down that treacherous road. Try it, and the Qwikster disaster would look like the feel-good movie of the decade by comparison.

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  • Report this Comment On December 25, 2012, at 10:43 AM, never2dull4u wrote:

    I think Hastings should give the viewers the choice of having advertisement in their streaming movies or not.

    For instance, for $10.99 watch all movies uninterrupted with no ads.

    For $7.99, see the advertisement at the beginning of the movie. This is really not an inconvenience to anyone. If NFLX can generate more revenues through ads and give viewers more contents, who's complaining?

  • Report this Comment On December 25, 2012, at 11:25 AM, jb757 wrote:

    Good article but a few inaccuracies:

    "So people are perfectly happy to pay Netflix a reasonable monthly fee for a content library that is large but not massive, good but not mind-blowingly great." Netflix is the only service that in fact has a "massive" library when you consider that both streaming and DVD/BD are available and you can switch plans any time.

    Netflix has added about 2.7 million domestic streaming subscribers in the first 3 quarters of 2012, not 3 million in the first quarter.

  • Report this Comment On January 01, 2013, at 10:56 PM, chipmonkey75 wrote:

    Ironically, I found this article because I was searching for information on why Netflix switched (apparently today) to playing commercials between every TV episode I've watched.

    Admittedly they seem to only be promoting their own show, but it's a clear indication that they're willing to venture down the path. And to be clear I don't know the scope except that between every one of the last three episodes of "The West Wing" I've watched, the automatic-play-next-episode screen was replaced with an ad for their own "House of Cards" show.

    You might want to dig into it, but it makes me less confident in the "this will never happen" predictions. I'm curious what you think. Happy New Year.

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