Why Netflix Advertising Business Becomes Jaguar Note

After nearly 10 years avoiding the advertising business Netflix (NFLX -1.54%). I am starting an advertising business.

Co-CEO Reed Hastings has long rejected the idea, arguing that the simplicity of Netflix’s ad-free subscription model is an advantage, but the market has finally forced his hand.

Netflix inventories are down 64%, many of which are due to the company reporting an unexpected drop in total subscribers in the first quarter and losing an additional 1 million net members in the second quarter. It is due to that.

The most obvious conclusion based on these numbers is that Netflix reached maturity sooner than expected. This is especially true in the core North American market, which has lost a net 1.9 million subscribers in the last two quarters.

The service already has more than half of its North American broadband households as subscribers, so its growth potential is limited. If you can’t expand your subscriber base, the only viable option to increase revenue in North America is to raise prices (which you’ve done several times in recent years) or sell ads. The company is also beginning to offer customers “paid sharing” or payment options to add users to their household accounts to reduce password sharing, but advertising is the best idea to grow the top line. is.

Why ads are huge

Hastings is right that Netflix’s simplicity has historically been a strength that has helped attract subscribers. In fact, its simple subscription model dates back to the days when DVD-by-mail companies promised a simple flat monthly fee and no late fees.

But now it’s clear that sticking to it means leaving a lot of money on the table.

Netflix is ​​a second quarter shareholder letter about viewing time NielsenWas far ahead of its competitors, including television broadcast networks. During the 2021-22 TV season, viewers watched 1.3 trillion Netflix content. CBS was second with 735 billion and NBC was third with 579 million. Combined, these two legacy broadcast networks have slightly longer viewing times than Netflix. Among the streamers, Disney + came in second with 245 million minutes. In short, people spent more than five times as much time watching Netflix as they spent with their closest streaming rivals.

Given the huge size of the content budget, it may not come as a surprise that Netflix gets more viewing time than any other peer. The problem is that Netflix isn’t monetizing its viewers five times more than its competitors. This is because the all-you-can-watch model does not benefit your business if you spend extra time on the service.

Ads can fix this. With an ad-based hierarchy, Netflix earns revenue based on viewing time and leverages that high level of engagement, rather than on a per-subscription basis.

Advertising layer works

Perhaps the best example of a streaming service that allows you to choose between ad-based hierarchies and ad-free options is Hulu, which is currently owned by Hulu. Disney.. Hulu currently sets the price of its ad support service at $ 6.99 per month, but viewers who want an ad-free experience will pay $ 12.99 per month. Average monthly revenue per Hulu subscriber was $ 12.77 in the last quarter. In other words, the revenue from customers in both categories is about the same. At times, we make more money from ad-supported customers than without ads.

In 2019, Hulu said 70% of its viewers are in the ad support tier, showing that streaming subscribers (at least in that case) prefer the low-cost ad-based tier. Hulu was initially launched as an ad-based service and only debuted the ad-free layer in 2015. Netflix is ​​unlikely to move its subscriber base to a mix like Hulu, but the commercials are still clear about the share of users who choose the option.

What it means for Netflix

In addition to the demand from viewers, there should be sufficient demand among advertisers. After all, Netflix was once the main reason for the leveling of the highly profitable linear TV ecosystem, as well as the huge TV advertising industry. Advertisers are hungry to replace their eyes. Because Netflix has detailed data about home and personal viewing habits, Connected TV enables better ad targeting than Linear TV. In a broader sense, digital advertising has already become a huge industry, bringing huge benefits to leaders such as: Meta platform When alphabet (I own YouTube).

Netflix provides advertisers with another platform with a large global reach. Streamers still need to run in new businesses, but they have everything to succeed.

Alphabet Executive Suzanne Frey is a member of The Motley Fool’s Board of Directors. Randi Zuckerberg, a former Facebook market development director and spokeswoman and sister to Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Jeremy Bowman holds positions at Meta Platforms, Inc., Netflix, and Walt Disney. Motley Fool has positions and recommendations for Alphabet Inc., Alphabet Inc., Meta Platforms, Inc., Netflix, and Walt Disney. The Motley Fool recommends the following options: The January 2024 long call is $ 145 at Walt Disney and the January 2024 short call is $ 155 at Walt Disney. The Motley Fool has a disclosure policy.