Netflix new series Territory.
Streaming giant Netflix is on track to reach “critical” subscriber scale for advertisers in 2025, creating a strong base from which to further increase ad tier subscriber membership.
The company is also pleased with engagement on advertising supported subscription plans with view hours per member similar to that of the Netflix standard plan.
However, more work needs to be done improving the offering for advertisers and Netflix doesn’t expect ads to be a primary driver of revenue growth next year.
Netflix posted a 15% lift in revenue to $US9.82 billion for the September quarter, mostly in line with market expectations.
Average paid memberships increased 15%, or about 5 million (versus 8.8 million in the same quarter last year), to 282.72 million. Average revenue per member was flat.
At a briefing of market analysts, Steve Cahall of Wells Fargo asked what levers would move advertising to become a primary contributor to growth?
Co-CEO Gregory K. Peters said Netflix had to grow ad tier membership to provide scale relevant in each market for advertisers.
And then the company has to improve capabilities and attractiveness to advertisers and to monetise that inventory.
“We've made some really solid progress,” he said.
“Ads plan accounted for over 50% of sign-ups in our ads countries. That's a leading indicator about how you think about sort of ads membership there.
“Our ads plan membership base was up 35% quarter-over-quarter. That's over probably four quarters of really significant growth as well.
“We expect to be at critical scale as our advertising partners tell us they need us to be in each of our 12 ads countries in 2025.”
And engagement by subscribers is healthy. Ads plan members are watching a similar amount of programming to non-ads subscribers.
“This was our top area of improvement,” he said. “I'm incredibly proud of the significant progress that our teams have been able to deliver on that front.
“And because they've been able to do that, that allows us to turn more attention to our second priority, and that's effectively monetising all that growing inventory.
“We've got a lot of work still ahead of us to achieve that goal, to make our offering better for advertisers. It's going to be a priority for us for several years coming, but we're moving.
“Our first-party ad server, which is a key component of unlocking value in the space, that's on track to launch in Canada this quarter and then the rest of our ad markets in 2025.
“We've got our partnerships with Trade Desk and Google Live, and those are going well.
"We've got a road map for more formats, for more features, for more measurement. That's all coming.
“So while we've got lots of work to do, we are very confident in our ability to execute and grow our ad business much like we did with the paid sharing initiative.”
In 2025, he expects advertising revenue to roughly double, albeit from a small base.
At this year’s US upfront, Netflix saw more than 150% in advertising sales commitments.
Forrester VP and research director Mike Proulx said Netflix is getting increased viewer engagement but a decline in net new subscribers.
“On the surface, Netflix is trending in all the right directions. Financially, revenue and operating margins continue to increase and expenses are down,” he said.
“Viewer engagement is also notably up. However, a steep decline in net new subscribers is what’s concerning. While there’s room for net subscriber growth internationally, in the US things are getting tapped out.
“That’s why accelerating growth via advertising becomes paramount to Netflix’s go-forward strategy and also why the company will stop reporting on subscriber numbers come 2025.
“In a way it’s a ‘don’t look here’ tactic to draw attention away from a material deceleration in new subscribers and, instead, draw focus to overall revenue which gives a fuller picture of the company’s financial health.”
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