Netflix is throwing resources at its advertising business despite flagging that this won’t be a big contributor to revenue for a couple of years yet.
The streaming giant, announcing its June quarter results, said it didn’t expect advertising to be a primary driver of growth in 2024 or 2025.
Membership of its advertising supported subscription model grew 34% in the three months to June 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.
“I'd say we're very pleased with how we're scaling our ads business,” Netflix co-CEO Greg Peters told market analysts in a briefing.
But having a primary revenue impact across a subscription business for a long time takes time.
In the meantime, Netflix is growing its capability.
“We're adding more ads operation folks, building our capabilities to meet advertisers,” he said.
“A big component of that is giving advertisers more effective ways to buy Netflix. It's a big point of feedback that we heard from advertisers. “
The other big area of growth is product and technology stack, including building an ads server.
“We're excited to launch that in Canada this year and then the rest of our ads markets in '25. That unlocks a whole set of innovations that we expect that are focused on a better user experience for our members on those ad tiers and better advertiser features.
“And ultimately, really, this is about bringing what has been amazing about digital advertising in terms of targeting relevance, measurement.
“And what we think is amazing about TV advertising, which is an incredible creative format, better creative format in many cases than digital, as well as the ability to put those advertisements next to content, titles, stories that are impacting the social conversation, which is important for advertisers.
“So lots of work ahead. We've got years of work to do but that's the line that we're moving forward with.”
Analysts at advisory and consulting firm Madison and Wall estimate Netflix ad inventory is still relatively modest.
“Even with 34% sequential growth in the number of members subscribing to their ad tier, we estimate that the company has only 0.6% of total TV ad inventory because the number of ad-supported subscribers remains small and ad loads are necessarily light,” the analysts wrote in a note to clients.
“This figure will undoubtedly grow significantly from current levels, especially as the service offers more programming which exposes advertising to broader audiences, as with upcoming NFL games at the end of the year.”
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.”
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