Streaming platform Netflix, releasing its June quarter results, reported “steady” progress with its advertising supported subscription model.
Membership grew 34% in the June quarter, compared to the March quarter.
The ads tier, in just over 18 months since launch, now accounts for more than 45% of all signups in markets (including Australia) where that subscription model is available.
Overall, Netflix added a better than expected 8 million subscribers globally in the June quarter, taking total subscribers to 277.7 million.
Revenue was up 17% to $US9.5 billion and Netflix now expects full year revenue growth of 14% to 15%.
And analysts see better profit margins for Netflix by adding advertising to subscription revenue but building that side of the business takes time.
Forrester VP and research director Mike Proulx said Netflix’s commitment to its ads business is just beginning to show signs of scaling, meaning it’s headed in the right direction.
“That’s notable because ad revenue is a critical component to Netflix’s go-forward growth calculus," Proulx said.
“It’s because the company can’t rely on net paid subscriptions alone as the primary contributor to revenue growth because they aren’t trending upward.”
Netflix described ad revenue as growing "nicely" and is becoming a more meaningful contributor.
“But building a business from scratch takes time — and coupled with the large size of our subscription revenue — we don't expect advertising to be a primary driver of our revenue growth in 2024 or 2025,” the company said in a letter to shareholders.
“The near term challenge (and medium term opportunity) is that we’re scaling faster than our ability to monetize our growing ad inventory.
“It’s why continuing to build our ad sales, measurement and tech capabilities is so important.
“Based on everything we’ve learned and our progress over the last 18 months — we’re confident that advertising will be a key component of our longer term revenue and profit growth.
Netflix said advertising fulfils two important strategic priorities: lower prices to consumers; and additional revenue and profit stream.
“We also continue to improve the service we offer advertisers,” said Netflix.
“For example, in the UK, starting September, Barb will measure Netflix’s ad supported plan, making it easier for clients to plan campaigns and understand their audiences on Netflix.
“We also have new features like the ‘pause’ or ‘keep watching’ ads and in the two months since the launch of the beta in May, we’ve closed over 60 pause ad campaigns with big brands like Expedia, Coca-Cola, Ford, L'Oréal and McDonald’s.
“Most important of all, at our Upfront, we announced our new, in-house ad tech platform, which we’ll test in Canada later in 2024 and launch more broadly in 2025.
“This will give advertisers new ways to buy, insights to leverage and ways to measure impact.”
On programmatic, Netflix is expanding to include The Trade Desk, Google DV 360 and Magnite.
“Given this sustained progress, we believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025, creating a strong base from which we can further increase our ad membership in 2026 and beyond,” Netflix said.
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