Although it is still early days, Netflix Inc. executives predicted the company's new advertising-supported product could contribute 10% or more of the streaming leader's revenue base over time.
Speaking on the company's Jan. 19 earnings call, CFO Spencer Neumann said Netflix would not have entered the ad arena "if it couldn't be a meaningful portion of our business," which the executive defined as at least 10% of revenue. Netflix reported $31.62 billion in total revenue for 2022.
The company launched its Basic with Ads service in the U.S. and 11 other nations in November 2022. U.S. subscribers pay $6.99 a month for the ad-supported service. Netflix expects its ad business to be equal to or bigger than streaming rival Hulu LLC's ad business in the years to come, Neumann said.
Netflix estimated that roughly half of Hulu's subscribers are on its ad tier. "It's a multibillion-dollar business for them already, and that's a domestic business, U.S. only. So lower reach, lower engagement than us," Neumann said on the call.
During its fiscal year 2022, which ended Oct. 1, 2022, Walt Disney Co. reported that ad revenues for its direct-to-consumer segment, which includes Hulu, grew 11% to $3.73 billion.
The advertising revenue growth reflected advances of 7% from higher rates due to an increase at Hulu and, to a lesser extent, at Disney+. The remaining 4% came from higher impressions due to international gains at Disney+, plus U.S. sports streamer ESPN+ and Hulu. The increase in impressions at Disney+ was primarily due to airing key cricket competitions in 2022 that did not run in 2021.
Disney+ began offering an ad-supported subscription tier at a monthly retail cost of $7.99 in the U.S. on Dec. 8, 2022.
Greg Peters, Netflix co-CEO, COO, chief product officer and director, said the company, which recently reached a measurement deal with Nielsen Holdings PLC, is comparing viewer engagement for its ad-supported and subscription-only offerings.
The company did not specify how many subscribers are on the ad-supported plan, but executives assured analysts that the ad tier was not undercutting the economics of its higher-priced subscription base.
"We aren't seeing, as expected, much switching from high [average revenue per member] subscription plans like premium into our ads plan," Peters said.
Netflix added 7.7 million net new subscribers in the fourth quarter to finish 2022 with 230.7 million global customers, up 4% on an annual basis.
Ad uptakes
Respondents to Kagan's European Consumer Insights surveys fielded in December 2022 showed the uptake for Netflix's new ad tier ranging from 6% to 12% of total Netflix users in France, Germany, Italy and the U.K. Kagan is a media research group within S&P Global Market Intelligence.
The surveys revealed a fairly even uptake for Netflix's basic, standard and premium tiers across markets, with about 25% to 30% of users opting for the basic plan.
In France, Germany, Italy and the U.K., adoption of the ad product only marginally correlated with the users' household income levels.
Linear budget pursuit
At this point, Netflix is largely taking aim at linear TV budgets, which Spencer Wang, vice president of finance, corporate development and investor relations, pegged at about $180 billion globally, exclusive of spending in Russia and China.
Over the next couple of years, Netflix largely will be pursuing dollars aimed at a "lean back experience," which "lends itself to certain kinds of advertising and certain kind of advertising goal," Peters said.
As COO and head of product, Peters helped spearhead the ad-service's rollout and has been elevated to co-CEO with Ted Sarandos. Reed Hastings, Netflix's co-founder, had been co-CEO alongside Sarandos but is now executive chairman.
Sarandos, when asked about introducing a free-ad-supported service, said Netflix is "open to all of these different models but has a lot on its plate this year."
That includes the ad product as well as the upcoming rollout of paid sharing options and an expansive content slate.