In a recent fourth-quarter earnings statement, Netflix announced its early progress on its ad-supported tier that was launched in November. On a call discussing the results, analysts asked about giving money back to brands and the executives emphasized that the platform is still in the “crawling” phase.
Priorities: In the coming months, Netflix plans to prioritize improvements in ad delivery validation, measurement, and targeting. It also aims to refine its sales and operations processes with Microsoft. The company believes that advertising could become a significant part of its revenue, potentially 10% or more of its $30 billion annual revenue.
End of 2022: After a challenging start to 2022, Netflix ended the year on a strong note, with 7.7 million paid subscribers and revenue growth in line with forecasts.
Comparison to Hulu: During the analyst call, executives compared Netflix’s ad-supported media to that of Hulu, which has a 10-year head start in the industry. About half of Hulu’s membership is on such a plan, generating billions in revenue.
Long-term Path: Netflix Chief Financial Officer, Spencer Neumann, emphasized that the ad-supported tier is a multi-year path and the company is not aiming to be larger than Hulu in the first year.
Revenues from Ads: Neumann stated that Netflix wouldn’t have entered the advertising industry if it didn’t believe it could generate 10% or more of annual revenue from the segment.
User Engagement: Netflix highlighted its quick and smooth launch of the ad-supported tier with the help of Microsoft. User engagement also appears to be similar to the ad-free package, indicating that commercials are not affecting those who sign up.
Promotion of Greg Peters: Netflix’s new Co-CEO, Greg Peters, was promoted from Chief Operating and Product Officer to Co-CEO around the time of the earnings report. Peters, who is behind the ads strategy, replaces Co-Founder Reed Hastings, who is transitioning to an executive chairman role.
Limited Ads: Netflix has limited commercial time to just a few minutes per hour to not push a heavy ad load on users. Some early brands testing the service include AB InBev, L’Oreal Paris, and NYX Professional Makeup.
Advertiser Feedback: Executives were pressed about giving money back to advertisers, as some reports indicate that the business is hitting only 80% of its expected audience in some cases. They argue that the business is still immature and ironing out the kinks.
Accelerating Transformation: Netflix is making multiple moves this year to accelerate its advertising transformation. It recently deepened its partnership with Nielsen for measurement and audience insights and will present during the upfronts season, taking a slot traditionally held by CBS.
Chasing TV Budgets: The upfronts maneuver offers another signal that Netflix is chasing more traditional TV budgets instead of those allocated to digital platforms like Google and Meta, which executives believe would be more difficult to compete against.
First-Party Data Advantage: Peters said that the growing relevance of first-party data is a real advantage that Netflix can bring, particularly relative to the traditional TV world.
Netflix reported early progress on its ad-supported tier, which launched in November, with 7.7 million paid subscribers and revenue growth in line with forecasts. The company is making moves to accelerate its advertising transformation and is prioritizing improvements in ad delivery, measurement, and targeting.