As last week brought the long-awaited, and arguably overhyped debut of Netflix’s new ad tier, I had the chance to sit down with Ed Laczynski, CEO of enterprise OTT app and platform builder Zype (who by virtue of their alphabet-ending company name had the last word in last month’s 2022 Streaming Media 50 announcement) to talk about what Netflix’s move means in the context of the ever-evolving OTT monetization landscape, and get some perspective on longtime, current, and emerging trends. We also talked a bit about how will impact the current and coming ad inventory ecosystem.
Netflix is, of course, in good company, as other premium platforms like HBO Max (June 2021) and Disney Streaming (December 2022) have added or are adding ad tiers. And Zype has been helping companies build hybrid platforms since the company’s inception, so the trend is a long one. Hybrid OTT models have been around for years, with major players like Hulu experimenting with multiple approaches and levels and proving that tiered offerings simply work. Ed and I delved into all this and more.
This interview was edited for length and clarity.
Steve Nathans-Kelly: Given that hybrid models have been a strong part of OTT from the beginning, is the arrival of ad tiers at Netflix, HBO, and Disney+ a sign that premium SVOD is in decline, or—given that hybrid model has been part of OTT from the beginning—that they’re just diversifying their model?
Ed Laczynski: It’s funny, because when we started Zype around 2015, some of the early customers that we were working with that were starting up media publishing companies and trying out new, genre-specific niche content—extreme sports, or cooking, or whatever it was—wanted the opportunity to do hybrid. They said, “We want to sell subscriptions, and we want to do advertising,” because they were upstart companies that wanted to attach revenue wherever they could get it. And I remember us counseling them and saying, “It’s very complicated and you need the reach first to get it right. You actually need the reach to drive meaningful revenue and advertising.”
And I think one of the underlying assumptions here and the trends are that you now have these major streaming platforms like Netflix realizing that they have the reach, they have the model, they have the audience engagement, and why wouldn’t they try to create new revenue opportunities—especially in a world where there’s a whole bunch of people in the US, in Lat-Am, in Asia, and in Europe, that would much rather pay a lower fee every month and are totally fine with watching targeted advertising. And they’re conditioned to it already, because we’re already used to it from broadcast. Obviously, there’s the cord-never cohort, and for them this will be a big shock if they only have a Netflix account.
But our data says there are ads being shown on social media and on video platforms like TikTok. There are interstitials on Instagram, and on your TV news and weather, you’re seeing ads. So this is more about the codification of broadcast as it is about any other trend. And much like baggage fees—you and I old enough to remember not having to pay for baggage fees, but we all get used to it and forget that it used to be a different way. So I think it’s sort of inevitable, based on these trends.
Steve Nathans-Kelly: I think part of the surprise with Netflix going in this direction is that they exemplified this subscription-only premium content model.
Ed Laczynski: Netflix started with delivering DVDs in the mail. So if anyone can pivot and turn and try something new and be successful with it, it’s Netflix. I think you’d agree this isn’t a major wholesale kind of revolution in distribution. This is just a way to attach more revenue to the their platform. But the FAST channel momentum that we’ve seen over the last two years with both the proliferation of these free, ad-supported television platforms and the adoption of them have also probably given some comfort to Netflix. Their viewers are used to this format, whether it’s Sling TV or YouTube TV, or totally free-to-watch stuff like Peacock and Freevee.
So I think that the bet is, in that part of the market, especially where there’s cost sensitivity, this move will be welcomed. A few years ago, I remember thinking, “There’s plenty of wallet share left for SVOD services.” There’s less wallet share available now, even for folks who aren’t as cost-conscious as others. At a certain point, you can only subscribe to so many more things. So I think we’re ready for it as a viewer community. And it will likely stick. And to your point, so many platforms have done this now that they can just follow the model. And there’s demand. We’re selling out of video ads.
And I think there’s opportunities in an ad-supported platform that have value for the publisher and the distributor and the viewer beyond just sort of taking your attention away from a show, and maybe you get a relevant ad and find something you like. It’s the ability to cross-sell, to promote, and to tell stories a little differently in shortforms. You can use advertising in a unique way. Particularly for someone like Netflix where they have to create the FOMO and the water cooler conversation—that’s Netflix’s bread and butter. They need to generate that awareness, and having more opportunities to promote what’s coming up or what just happened or what you missed out on—who knows where this goes in the future as they expand their scope?
It’s not just about advertising. There’s a lot more you can do with it. And I’m sure they’re thinking about that. They have one of the most creative user experiences. They’re always on the leading edge in terms of how you’re browsing the carousel on Netflix. It’s always a step ahead of pretty much everybody else. So I imagine it’ll be a pretty compelling experience.
Steve Nathans-Kelly: Personalizing the ad experience is great when it works. A lot of the time, the ads we see repeatedly miss the mark pretty badly, and I think many of us have had the experience where we sign up for an ad-supported service to watch one show and then churn. And because we don’t demonstrate any other interests while were there, we get the same ad every time. Is there any way around that?
Ed Laczynski: There’s so much breakage in server-side ad insertion and that interface, and the breakage is in two ways. There’s share-of-voice breakage where you’re just basically overloading the viewership with like the same ads over and over again. And it actually creates a negative brand experience. Studies show that like people dislike the thing more after that happens to them because they’re constantly being bombarded with the same message.
And then there’s still a lot of breakage, meaning a lot of slates are being shown. If we look across FAST and paywall MVPDs, you’ll see a lot of “coming back soon, you’re watching ESPN,” or whatever. There’s a lot of breakage there. I think the sales model, the ad-demand model, the SSP, the interface with the user and the data—they’re not perfect by any means. There’s still a ways to go.
I think that Netflix being an entrant here is probably good for others who maybe have share-of-voice issues. And now there should be more demand, more diverse brand advertisers, maybe more brands coming in and putting even more budget into digital versus traditional broadcasts. So you don’t see that same Kraft mac-and-cheese ad 17 times while you’re watching your show.
But there are also some plumbing and connectivity and data relevance issues that are still being solved. And we see it with our publishers where the pipes are a lot different than traditional broadcasts. A lot has to go right for you to have a great experience as a viewer. And more demand’s gonna help that. And especially more inventory from a platform like Netflix who can now go to the upfronts and things like that where they don’t participate. You have to imagine they’re gonna do it well, and they’re gonna build out teams of both partners and first-party ad sales. And so that’s really good. What’s good for the goose is good for the gander.
Steve Nathans-Kelly: Speaking of partners, what’s your take on Microsoft’s role in the new Netflix tier?
Ed Laczynski: Microsoft has a lot of different businesses. Their Xbox market really raised the bar for user experience and engagement, and they have all sorts of experiential marketing opportunities and advertising opportunities. But they’re not first thought of as a technology provider or a demand or supply-side integrator or anything like that. For them to offer this on a stack level, I think that the cloud services piece is interesting here. And I’m sure there was a lot of negotiation and optimization between Amazon Web services and Microsoft and other platforms like that to try to get Netflix in the best position possible.
Again, it’s a pretty complex set of things that have to happen for you to get an ad on time that’s relevant to you, and reliably not the same thing every time. I have to imagine that Netflix vetted out the Microsoft technology stack and things like that. There are a lot of solutions out there for this sort of stuff, and Microsoft’s not necessarily top of mind for that. We don’t look at them as a competitor for our products and server-side insertion or playout or anything like that. So, it’s interesting.
Steve Nathans-Kelly: Speaking more generally about smaller or newer players in the OTT space, is it harder to get to a subscription level where you can make that shift to hybrid or ad-supported and compete for advertising?
Ed Laczynski: It’s much busier now; there’s a lot more competition. It’s harder to be noticed. It’s still easier to launch a subscription or transactional model or some sort of commercial paywall. And there are lots of forms of transaction-based, video-centric channels or media plays. Ad support is just harder for the main reason that it’s all about scale. It’s very hard to have relevant advertising at this sort of cost per thousand impressions if you don’t have scale. And whether it’s demand partners, supply partners, or brands, the level of expectation there for where their ads are gonna be shown and how their brand is gonna be placed in context, matters more now more than ever. And so the bar is higher for ad-supported.
For subscription businesses, we still see a lot of opportunity, and I don’t think it’s a red ocean yet. I think there’s blue ocean opportunity. We’re still seeing subscription businesses that come from brick and mortar, like fitness businesses and the faith market, and even in traditional media around sports at different levels—amateur, scholastic, collegiate, et cetera. There’s a lot of content that could be captured and broadcast, and there are a lot of folks who have a lot of passion and expertise in those areas. And I think subscription content still has a place. But it’s harder to get noticed.
And I think the marketing costs are just gonna be higher. The acquisition costs for content are still pretty high. If you’re creating original content, if it’s live or it’s user-generated, that’s one thing. But if you’re out there in the marketplaces at MIPCOM or something like that, and you’re trying to acquire a bunch of licenses, it’s tough. There’s a lot of demand, and then you have to have something special. So the bar is going higher. I do think it’s just still much higher for ad-supported businesses.
Steve Nathans-Kelly: And so when a channel a service is making that transition where in that process does Zype come in?
Ed Laczynski: We’ve always been a big believer in hybrid strategy for our customers and what fits for them for their budget, for their goals, for their content, for their audience. So we support businesses that are looking to do everything from just wanting to help their team manage their content to getting it out on existing social media platforms—just using what’s out there and not even try to go direct to consumer—all the way to customers that are doing direct FAST streaming to the edge, 10,000 videos-a-second type of thing where they have to pipe in and serve ads and deliver content and capture data. For the niche content companies I know you’re familiar with, and the folks that have a genre specialization, I think the ones that can scale and have got to scale—FAST has been a boon for them.
So we’re seeing a lot of companies say they’re gonna do the big three proprietary owned-and-operated apps—Roku, Apple, Amazon Fire—and maybe one or two other specialty TV devices like Xbox and FAST. And through those two things, they have an opportunity to engage a viewer in a different way. In one case, they’re really dependent on the distributor. In another case, they can have more agency, but there’s more cost and experimentation that has to happen there. That’s where we’re seeing a big shift. And then what we do is try to help them get a handle on their content, give them a place to put it, store it, manage it, and give all of their different business stakeholders a view into it, whether it’s the content programmers, the engineers tying it into their apps, or the VP of distribution trying to make a deal with Samsung TV Plus, and give them a framework for that. And then let them go with as little friction as possible, get to those endpoints, and scale them from there.
Steve Nathans-Kelly: Looking ahead a few years, a lot of people have certainly reacted to Netflix’s move—and similar developments with HBO and Disney+—with sort of doomsday prophecies. Outside of companies that sell broader subscriptions like Apple and Amazon where you’re subscribing to bundles that are much more than a video service, do you think that SVOD’s days are numbered as services that provide video-only subscriptions?
Ed Laczynski: No, I don’t. First of all, I don’t think that especially the sort of platforms with high-value content like Netflix, HBO Max, Disney+, et cetera, are gonna give it away at any price point. There’s gonna be a fee to pay. I think you’re gonna see creative things like what HBO does, where your wireless subscription gets you to the bundle and there are subsidies happening there, which is really smart. You have Hulu that’s kind of pioneered multi-tier, where you pay and you watch ads, you pay a little more and you still watch ads, but not as many. They’ve kind of perfected that. So I think the subscription component is always gonna be really important, because that’s what allows them to lower the price and get the unit costs down to the consumer. But I don’t think it can go to pure free to watch.
I was on a panel years ago with the CEO of tubi TV, and someone had asked them, “When is tubi TV gonna have originals?” And they said, “We’re just focused on getting publishers out and onto our platform.” And now they’re looking at originals and they’re gonna go the other direction. You’re gonna see some of these pure free platforms go the other direction and maybe start up charging. Or do what Peacock does and use it as a funnel, then drive into subscription. So there’s always gonna be a place for that recurring credit card payment. There’s something very compelling about that, that investors and shareholders like—something, from an evaluation perspective, that’s very attractive. So, I don’t see that going away anytime soon.
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