Ted Sarandos, Co-CEO of streaming giant Netflix, has confirmed that advertisements are coming to the streaming platform.
Speaking about the future of the company at the Cannes Lions Festival, Sarandos said Netflix would need to diversify to make up for the loss.
Netflix hopes the cheaper tier will encourage both new and lapsed customers to subscribe, with Sarandos saying, “We’re adding an ad tier for folks who say, ‘Hey, I want a lower price and I’ll watch ads.'"
A major U-turn
This is a significant sea-change from a company that has famously rejected the ad-funded model in the past and is often cited as a champion for subscription models around the world.
The company had always said it strongly believed in leaving marketing out of the streaming platform, and has never shown ads during or before its TV shows or films. But in recent months, rumours have suggested that it is considering an ad-free tier.
Pre-rolls or commercial breaks?
Sarandos confirmed that Netflix is already exploring options for ad-sales partnerships for the platform.
However, the company has not confirmed what the lower price will be, or how many ads viewers will have to watch per show when signing up to the ad-funded tier.
It could involve pre-rolls or ads during episodes, similar to Hulu with Ads with 3-4 minute commercial breaks.
Reports earlier this week suggested Netflix is in talks with Google over running its ad business, which is the biggest seller of online video ads through YouTube, so the brief pre-roll model.
Citing anonymous sources, the Wall Street Journal reported that Google and Comcast’s NBCU are both pursuing an exclusive pact with Netflix for the forthcoming ad-supported streaming package.
That followed a similar report by CNBC that Netflix has met with Google, NBCU and Roku about marketing tie-ups.
A lucrative new global channel for performance marketers
The news comes at the same time Netflix confirmed a further round of 300 layoffs.
As growth slows in mature markets, Netflix is increasingly focused on other parts of the world and investing in local-language content.
A cheaper ad-supported model could suit developing markets, and opens up Netflix as a major new media channel for performance marketers.
"While hundreds of millions of homes pay for Netflix, well over half of the world's broadband homes don't yet -- representing huge future growth potential," the company said.