Netflix’s move into advertising is showing progress, albeit slowly. The streaming giant has informed advertisers that new sign-ups for the ad-supported tier have doubled in January from December, indicating that the low-cost offering is becoming popular among subscribers. However, Netflix did not disclose the actual number of sign-ups. In the past, the company projected that it would attract only 1.75 million subscribers for this tier by the end of the first quarter, which is only 2.4% of its North American subscriber base.
Compared to Hulu, which is controlled by Walt Disney and has a 15-year head start in advertising, Netflix has a long way to go. Roughly half of the 42.8 million people who subscribe to Hulu’s main streaming service choose the ad-supported tier. Hulu generated $3.1 billion in connected TV ad sales in 2021 and is estimated to reach $4.25 billion this year, according to eMarketer.
Despite the competition, Netflix remains optimistic about its advertising business. The company expects its advertising revenue to grow from $0 to around $5 billion in a few years. The CFO, Spencer Neumann, stated that the company wouldn’t have entered this business if it didn’t believe it could be bigger than at least 10% of its revenue in the long run. This estimate is in line with a prediction by Ampere Analysis, which estimated that Netflix would generate $5.5 billion in total ad revenue by 2027.
However, it might take Netflix several years to catch up with Hulu and become a leading seller of connected TV advertising in the US. In the meantime, the ad tier is crucial to Netflix’s plan to revive its revenue growth. The company aims to return to double-digit revenue growth after it slowed significantly in 2022. Management expects 4% revenue growth in the first quarter of 2023, and the company’s five-year compound annual growth rate is projected to be 9-10%.
So far, Netflix is pleased with the results of its ad-supported tier. The company reports strong engagement, take rates, and minimal downgrading from premium plans. It also states that the plan is attracting new subscribers, and sign-ups for the ad tier are expected to grow over time. The potential of the ad tier should make investors optimistic about a reacceleration in growth for Netflix.