Netflix with ads launching as talks continue with studios over content

Netflix Inc. is rolling out an ad-supported tier of service in a dozen countries as it continues talks with major studios, capping a seven-month sprint between the streaming giant’s announcement about entering the ad business and the product’s debut.

The Los Gatos, Calif., company has so far secured big-name advertisers for its initial launch and hired new senior ad industry executives to help develop its business, but it continues to haggle with several major studios for the right to run ads against their content in the new service or put their content on the ad tier, according to people familiar with the matter. The service is scheduled to launch Thursday in the U.S.

The launch of the company’s ad-supported tier of service, called “Basic with Ads," comes a month before rival Disney+ starts its first ad-backed plan and as Netflix tries to boost subscriber growth and revenue after a tumultuous 2022. New ad-backed plans are important elements of a push within the streaming industry to make more revenue per subscriber by offering lower-cost plans that let consumers pay less in exchange for watching ads.

Among the studios with whom Netflix hasn’t yet finalized revised licensing agreements are Walt Disney Co., Comcast Corp.’s NBCUniversal, Sony Pictures Television, Warner Bros. Discovery Inc. and Lions Gate Entertainment Corp., people familiar with the negotiations said.

Disney makes no original content for Netflix, but it provides reruns of popular shows including “Grey’s Anatomy" and “How to Get Away with Murder." NBCUniversal is a big supplier of original and library content to Netflix, including the drama “You."

Talks also continue with Sony Pictures Television, which makes “The Crown" and “Cobra Kai" and sells its theatrical movies and reruns of “Breaking Bad" to the streamer. Production companies closer to a deal with Netflix include Warner Bros., which makes original shows for and sells library content to the streamer, and they expect to reach an agreement, the people said.

It is unclear what content from outside suppliers will be missing from the new service. Whether Netflix has the right to insert ads or include content on an ad-supported tier depends on the terms of its initial licensing agreements with studios. Netflix has said the tier will include content representing 85% to 90% of viewing on its platform, but it hasn’t spelled out what percent of its library that represents.

The new Netflix plan will cost $6.99 in the U.S. and will include four to five minutes of ads per hour of content, the company said this past month. It plans to take a “crawl, walk, run" approach to entering the ad market, executives have said, which means ad formats and its approach to ad sales will evolve over time.

While Netflix had been asking top dollar for brands to advertise on its ad-supported service, the ad prices some brands will pay have dropped after negotiations with media buyers, people familiar with the discussions say. Some brands have been reluctant to pay a steep premium for an unproven platform that isn’t offering sophisticated ad targeting, they said.

Netflix had been seeking to charge advertisers roughly $65 for reaching 1,000 viewers, but some advertisers have ended up paying between roughly $45 to $55 for ad time, ad buyers said.

It isn’t unusual for new entrants in the streaming space to seek high prices and then have buyers negotiate them lower. And ad costs can range wildly depending on the amount a particular brand spends, placement or how much the advertiser’s buyer commits to spend on an ad service.

Ad industry executives expect Netflix to be able to charge more if it improves its ad-targeting capabilities and grows the ad tier’s subscriber base. The company plans to collect users’ birthdays and gender and use that information for ad-targeting over a longer term. Netflix has secured higher ad rates for special placement, some ad buyers said.

Among the advertisers that plan to run ads on the service are luxury brand LVMH Moët Hennessy Louis Vuitton, people familiar with the matter said, along with beauty brands L’Oréal and Nyx. Netflix told analysts in late October that it was turning away some advertisers because it couldn’t accommodate all of the demand with the launch.

Netflix partnered with Microsoft Corp. to sell its early stage ad inventory and tapped two former Snap Inc. executives—Jeremi Gorman, president of worldwide advertising, and Peter Naylor, vice president of ad sales—to build out the business.

Madison Avenue has embraced Netflix’s new ad team, which is having an impact on negotiations, some of the ad buyers said. The duo threw a party during Advertising Week in New York this past month where deep-pocketed ad buyers hobnobbed with Netflix executives at the company’s office in the Flatiron neighborhood of Manhattan.

Netflix is continuing to bring in new talent to fill out its team, including measurement expert Julie DeTraglia, who was formerly head of strategy and research for Amazon Sports and will be vice president, ads measurement strategy, the company said Tuesday. Adam Gerber, formerly executive director of U.S. investment at GroupM, is also joining as senior director, client development, Netflix said.

The tier’s debut is a test of whether a lower-cost plan will draw new subscribers that so far were put off by existing price tiers, and if the ad-supported plan will steal customers from more expensive plan levels. Netflix has said customers don’t typically move between its existing service tiers and that while it expects some users to shift from its basic plan to the “basic with ads" level, it will have a neutral or positive impact on revenue.

Among current Netflix subscribers, middle- and lower-income users as well as older customers are more interested in shifting to an ad-supported tier than younger audiences, a survey of 1,300 current Netflix subscribers by Samba TV between August and September found.

Elsewhere, some 23% of gross new subscriber additions to HBO Max’s ad-supported plan in September were people who switched from its ad-free tier, according to streaming service data provider Antenna.

—Jessica Toonkel contributed to this article.