Programmatic Advertising Ecosystem - The Netflix Effect

In our 2024 Ad Tech Report (email info@rubiconinvestgroup.com for a copy), we probabilistically detailed three Inflection Points for the streaming ecosystem:

1. Consumers move from linear TV (Cable/Satellite) to streaming.

2. Publishers (e.g., Netflix, Disney+) will shift their growth focus from ad-free to ad-supported subscriptions.

3. Publishers will transact ad spot sales digitally (programmatically) as opposed to direct sales methods (i.e., via human capital).

In the “What’s Next?” section of our 2024 Ad Tech Report, we include this slide:

On May 15, 2024, Netflix updated the industry about the progression of its ad supported platform in an article titled "Netflix Upfront 2024: The Year of Growth and Momentum”. There are a few key takeaways.

To begin with, Netflix’s ad-supported tier “now has 40 million global monthly active users — up from 5 million a year ago. Over 40% of all signups in the ads countries now come from the ads plan.” 

The critical question in the 2nd probabilistic pathway is: will consumers opt for an ad-supported streaming experience or stick with the costlier ad-free option? Judging from Netflix’s rapid ad-supported growth rate, it’s clear that many customers are willing to trade a lower subscription price for the inclusion of ads.  However, this is but one marker. The trade-down by the consumer is playing out all over the streaming eco-system, albeit no other company has the same breadth of total subscribers as Netflix.

As it relates to the 3rd probabilistic pathway, Netflix is aggressively building out its ad tech stack. We understood that Netflix was out with RFPs for advertising partners, however, the company is accelerating its ad tech ambitions faster than many considered. From the press release, we learn: “This summer, Netflix will also expand its buying capabilities to include The Trade Desk, Google's Display & Video 360, and Magnite who will join Microsoft as the main programmatic partners for advertisers.”

While Netflix’s selection of The Trade Desk and Google is no surprise as each has been racking up wins, Magnite’s inclusion is a surprise to many. Skeptics believe there is a chance Magnite (and SSPs in general) may be disintermediated by direct integrations between DSPs and publishers. However, Netflix’s inclusion of Magnite as a programmatic partner provides counterevidence to the skeptics, at least in the near-term (the agreement is reportedly for 2 years). From Magnite’s perspective, management believes the inclusion is a testament to not only its best-in-class CTV technology, but also the important role an SSP plays in the ecosystem.

CTV Programmatic Landscape

A simple description of Programmatic advertising is that it’s a digitally run real-time auction (known as Real Time Bidding or “RTB”) where the publisher (e.g., Netflix) sells an available ad spot (i.e., commercial) to a brand (e.g., Ford) usually through its ad agency (e.g., WPP). 

Programmatic advertising traces its roots to first banner ad placed in 1994.  Initially, ads placed on the internet were sold by people negotiating directly with each other. As the internet evolved, digitally efficient tools replaced humans. According to eMarketer, “Programmatic advertising digital display ad spend will make up 90% of digital display ad spend in the US this year [2023], and that share is growing, according to our forecast.”

The longer arc thesis for the CTV Ad Tech ecosystem is that it will follow the same trend as internet advertising. Today, nearly all CTV ad spots are sold using legacy techniques, i.e., person-to-person, however, industry participants believe a significant portion of ad spots will be sold programmatically.

To understand why many believe programmatic will take share, it is important to understand the purported benefits for both the publishers and the advertisers.

• For publishers, programmatic enables the capture of the maximum price an advertiser is willing to pay per ad spot (This is the simple economic explanation from finance guys. For an industry insider’s explanation, please see this informative article).

• For advertisers, programmatic results in higher Return on Advertising Spend (ROAS) driven by the ability to respond to a highly engaged (or intent driven) audience and further refine and target the preferred viewers through rich audience analytics.

In his 2Q 2023 earnings call, Jeff Green, CEO of The Trade Desk, said “so we've recently done some studies on decisioning [utilizing fully programmatic tools] across the platform and compared it to PG [both negotiated and programmatic tools]. And we found that the value of decisioning, or the performance of the decisioning on a CPA [cost per action] basis is 5x better in general [emphasis added], or if you were to say it in terms of savings, it's an 83% save in order to -- in CPA costs in order to decision.”

Green’s comment drives home the value proposition, but we are at early days of adoption. Today, premium CTV publishers are testing the waters through hybrid tools, which DSPs and SSPs believe serve as an on-ramp to broader fully programmatic adoption. 

The longer-term direction and real benefit of this technology arrives through the use of automated decisioning and data usage.  Running this type of programmatic auction requires an SSP like Magnite acting on behalf of the publisher to optimize yield management (revenue per ad). SSPs aggregate demand from DSPs (e.g., The Trade Desk, Google’s DV360) who represent the interest of a vast number of brands and their agencies. Because Netflix wants to use its extensive customer data for internal use (likely packaging customer cohorts for decisioning) and protect it from leakage into the bid stream, the SSP plays a vital role as a buffer to protect data from external counterparties.  

The heated debate in the industry is whether publishers will build internal tech stacks that obviate the need for a 3rd party SSP.  While there are no definitive answers, there are valid arguments on both sides. On one hand we have Netflix’s integration with Magnite, but on the other we have the Disney (a long-time Magnite client) announcement of direct integrations with The Trade Desk and Google, seemingly implicating its ambitions to build internal SSP tools. However, too much focus on the major publishers misses important dynamics in the industry like the rise of FASTs, OEMs, and other digitally native publishers. We will discuss these points in a follow-up piece.

Long-Term Industry Implications

The legacy broadcasters, including Disney (Disney+ / Hulu), Paramount +, Comcast (Peacock) and Warner Brothers (Max), competing with Netflix have been slow to adopt programmatic. These incumbents employ large salesforces who facilitate negotiated ad sales. That process is cumbersome and doesn’t maximize revenue, although it does optimize for revenue stability and brand safety.

Probabilistically, it’s likely that the legacy publishers’ hand will be forced to keep up with Netflix.  In simple terms, if Netflix utilizes novel ad tech tools and The Trade Desk’s quantitative assessment of programmatic’s efficacy are correct, Netflix will generate higher ad revenue than those stuck using legacy methods. The positive feedback loop - where Netflix generates (1) more ad revenue from programmatic sales which will be used to (2) generate/acquire better/more content (movies/TV Shows), which (3) improves the customer experience, which (4) attracts more users and grows the subscriber base, which (5) attracts more advertisers who increase advertising spend on Netflix increasing its ad revenue and the cycle repeats - makes it increasingly difficult for media firms to compete utilizing legacy monetization methods.

To compete with Netflix, legacy media companies will be forced to accelerate full programmatic adoption. The fierce publisher competition driving the programmatic adoption cycle may provide a distinct benefit for the CTV/OTT ad tech industry leaders – Google, The Trade Desk, and Magnite.

Returning to the three Inflection Points, it seems we have reached the deterministic point for (1) consumers adopting streaming and abandoning linear TV and (2) publishers shifting their growth focus from ad-free to ad-supported subscriptions.

Now, we have reached a seminal moment on the 3rd Inflection Point - Publishers and Advertisers embracing programmatic ad sales as an ever-increasing portion of ad units transacted.

(Full Disclosure: we are shareholders of The Trade Desk, Google parent company Alphabet, and Magnite).

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