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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.
More expert advice from The Motley Fool
The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.