A question that has been following Netflix since the beginning of time is whether the SVOD giant would ever include advertising. Netflix management has consistently responded “no” and emphasized that their viewers expect an ad-free experience. Saying this so many times has created the perception that Netflix’s opposition to advertising is “religious” (i.e. so core to its brand/strategy/user experience that deviation simply isn’t possible) that no logic to the contrary will prevail.

But looking ahead to the new decade and the vastly different industry dynamics that are unfolding, I think there are many reasons why religion is finally going to give way to business imperatives. For anyone already saying, “no, no I just don’t believe Netflix could undergo such a conversion,” keep in mind the intense objection Steve Jobs had to subscription music. Then came Spotify’s incredible growth and in 2015, Apple Music was launched (note, Tim Cook took over as CEO in 2011, just prior to Jobs's death).

Laura Martin at Needham & Co released an excellent downgrade note last week articulating many of these reasons, while also downgrading Netflix’s stock. Much of her logic mirrors my own and what I’ve been saying privately to various industry colleagues over the past few months.

Laura shares her forecast that Netflix will lose 4 million subscribers if it does not launch a $5-7/month ad-supported tier in the U.S. The sub losses will cause a series of negative consequences: slashed profitability, difficulty financing massive content investments, rising subscriber acquisition costs, eventual sub losses internationally, etc. Laura draws a very clear line between continued resistance to advertising and the market re-thinking how Netflix’s stock is valued, explaining a $100/share outcome (down from $300/share currently).

While the consequences of not launching an ad-supported tier are pretty grim, equally important to me is the upside opportunity ads give Netflix (which Laura mostly explains as well). Netflix management is of course right that after years of indulgent, ad-free binge-watching, it’s hard to envision the interruptions. But the reality is that a lower-priced ad-supported tier gives Netflix an important new offering for Netflix resisters, former subs, current password-sharees and the budget-minded.

Viewers aren’t monolithic - their interests, budgets and circumstances come in every flavor. As Netflix has raised its rates, and new competitors have emerged (some with lower prices like Disney+, and some where well-loved programming like “Friends” and “The Office” which will be available on Peacock), it’s becoming ever-harder for Netflix to retain subs and attract new ones. As just one data point, consider Q2 ’19; following a rate increase and a weak content slate, Netflix lost 130K subs. That compared to a forecasted gain of 300K (which also highlighted the periodic imprecision of Netflix’s forecasting capability, even before new competitive dynamics began playing out).

Where viewers have been given the choice (e.g. Hulu, CBS All Access) of paying more to avoid ads, or paying less to have a light ad load, the vast majority choose the latter. There’s no reason to believe new Netflix subs would behave any differently (though existing ones may yield to inertia and leave their plans as they are).

It’s also worth noting the massive latent demand ad buyers will have for Netflix’s premium, brand-safe content and detailed first-party data. Connected TV advertising is booming and more content is critical to buyers being able to achieve their impression metrics while retaining full targeting capability. If executed properly, Netflix would instantly be at or near the top of every ad buyer’s campaign plan. For Netflix it would be almost like picking up money off the floor.

So having said all this, will Netflix hew to its religious opposition to advertising, or instead see it as a business imperative (as AT&T will do in 2021 by launching an ad-supported tier of HBO Max)? In all the years I’ve spent following Netflix it has only done 2 things that have caused me to really scratch my head - 1) irrationally launch Qwikster in 2011, a debacle which it quickly reversed and 2) object, bizarrely, to allowing subs to download content to mobile devices, which it also reversed, finally in 2016. I believe advertising is unlikely to become the third miscue, it’s just too compelling. However, the superstitious side of me can also see the resistance to ads continuing; based on the above, every 4-5 years Netflix does something really unexpected. By 2020 Netflix is about due to to do it again.

Six months ago, at VideoNuze’s Online Video Advertising Summit, Telaria’s CEO Mark Zagorski predicted that there would be an ad-supported version of Netflix sometime in the next few years. It was the first time I’d heard an industry executive publicly say it so emphatically. I’ll go one step than Mark - I think there’s a 75% chance of some news around advertising in advance of or concurrent with Netflix’s Q2 ’20 earnings, helping taking the edge off a likely acceleration of U.S. sub losses vs. Q2 ’19 (note, under its new reporting structure starting in Q4 ’19 Netflix will be grouping U.S. and Canada results into a “UCAN” region. Netflix has said the U.S. accounts for roughly 90% of the UCAN region).