Netflix Makes Cable Companies Rethink Their Ad Strategy

By Jamal

Source: Netflix.

When it comes to monetizing content, there are two main ways you can make money from your articles, music, and cute cat videos. The first is rather straightforward: You can charge users directly to experience the content, whether on a one-time basis (think theater-viewed movies), or on a subscription basis such as The Wall Street Journal's paywall-gated content, newspaper delivery, and cable television.

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There's another way to make money from money from content: advertisements. This has the benefit of being easier to implement, as it's essentially a third-party payment construct. The person consuming the content isn't the same as the person funding the content. Companies (mainly) relying on this monetization method are most Internet publishers, streaming-based music services such as Spotify and Pandora, Alphabet's YouTube, and ... cable television.

As you've probably noticed, there's one standout that makes money on both a subscription basis and through advertisements: cable television. And unlike most other content outlets that provide either sub-based, ad-free options, or free, ad-supported models, cable TV forces users to pay for viewing ads. Even worse, the ad load has continued to increase, displacing programming in the process, and now takes nearly 25% of total viewing time. Netflix , however, has one industry network rethinking these moves -- to a degree.

One network is reducing its ad loadAccording to Variety (H/T BGR), Time Warner's TruTV is decreasing its ad load, and pretty significantly at that. Instead of the ad load of 18 to 19 minutes per broadcasting hour, the company will drop that figure to 10 to 11 minutes per hour, cutting its ad-load percentage 43% at the midpoint. By offering what TruTV's president, Chris Linn, refers to as a "premium experience," the company hopes to hold viewers for longer.

These moves seem to focus on millennials, as Linn mentions that newer generations have "access to content that does not have commercials" -- which is a rather odd way to pronounce Netflix. To make up for the lower ad load, the company does appear to be asking for higher per-ad prices to make up for the loss of ads, as fewer ads are also arguably more effective.

How has Netflix's subscription model held up versus cable?Although subscriber growth has slowed from its torrid pace, Netflix's total subscriber base is now in excess of 69 million. Throughout the first half of the year (ignoring the recently reported third quarter for comparison's sake), the streaming business service, both domestic and international, produced $2.9 billion in revenue, up 32% from $2.2 billion in last year's corresponding quarter.

For Time Warner, its entire Turner Broadcasting division -- which includes TBS, TNT, CNN, and TruTV, among others -- reported subscription-based revenues of $2.7 billion in the corresponding period, meaning Netflix outgrossed Turner on subscription-based revenues. Time Warner did report $5.5 billion through a combination of advertising and content added to its top line, with subscription and ad-based revenues up only 2% and 1%, respectively, on a year-on-year basis.

And while it should be noted that Netflix is still in its growth phase, perhaps making year-on-year growth comparisons incompatible, it does show how Netflix's subscription model is now higher-grossing than one of the largest cable-network property with a larger growth runway. And, even worse, it's now forcing a few networks to rethink their ad-based model as consumers tire of paying subscription fees for commercial-bloated content.

The article Netflix Makes Cable Companies Rethink Their Ad Strategy originally appeared on

Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Netflix, and Pandora Media. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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