Netflix sees advertising business generating 10% of total revenue as it matures

While still in its early stages, Netflix Inc. executives estimate the company’s new ad-supported product could contribute more than 10% of the streaming leader’s revenue base.

On the company’s Jan. 19 earnings call, CFO Spencer Neumann said that if Netflix “can’t be a significant part of our business,” it’s at least 10% of revenue. He said he would not have entered the field of advertising. Netflix reported that 2022 gross revenue is $31.62 billion.

The company launched its Basic with Ads service in the US and 11 other countries in November 2022. US subscribers pay $6.99 per month for ad-supported services. Netflix expects its ad business to match or surpass that of streaming rival Hulu LLC in the next few years. Neumann said.

Netflix estimates that about half of Hulu’s subscribers are in its advertising tier. “It’s already a multi-billion dollar business for them, it’s a domestic business, it’s only in the US, which means they have lower reach and lower engagement than we do,” Neumann said by phone.

During fiscal year 2022, which ended October 1, 2022, Walt Disney Co. reported an 11% increase in advertising revenue for its D2C segment, which includes Hulu, to $3.73 billion.

Advertising revenue growth reflects a 7% advance driven by Hulu growth and, to a lesser extent, Disney+ growth in higher fees. The remaining 4% came from impression growth from international gains on US sports streamers ESPN+ and Hulu, in addition to Disney+. The increase in impressions on Disney+ is largely due to his 2022 airing of a major cricket tournament that did not take place in 2021.

Disney+ began offering an ad-supported subscription level for $7.99 per month in the US on December 8, 2022.

Netflix Co-CEO, COO, Chief Product Officer and Director Greg Peters said: A recent measurement deal with Nielsen Holdings PLC compares audience engagement between ad-supported and subscription-only services.

The company hasn’t disclosed how many subscribers it has for its ad-supported plans, but executives assured analysts that the ad tier wouldn’t hurt the economics of its high-priced subscription base.

“As expected, we don’t see many reversals from highs. [average revenue per member] Add a subscription plan, such as Premium, to your advertising plan. ” Peters Said.

Netflix added 7.7 million net new subscribers in the fourth quarter to close out 2022 with 230.7 million global customers, up 4% on an annual basis.

Ad ingestion

Respondents to Kagan’s European Consumer Insights survey, conducted in December 2022, found that between 6% and 12% of all Netflix users in France, Germany, Italy, and the UK were embracing Netflix’s new ad tier. Kagan is a media research group within S&P Global Market Intelligence. .

The study revealed a fairly even distribution of Netflix’s basic, standard, and premium tiers across the market, with approximately 25% to 30% of users opting for the basic plan.

In France, Germany, Italy, and the UK, ad product adoption was only marginally correlated with users’ household income levels.

Pursuit of a linear budget

At the moment, Netflix is ​​primarily targeting linear TV budgets, with vice president of finance, corporate development and investor relations Spencer Wang estimated that the company is at about $180 billion worldwide, excluding spending in Russia and China. Estimated.

Over the next few years, Peters said, Netflix will pursue dollars primarily aimed at “lean-back experiences” that “serve certain types of ads and certain types of advertising goals.”

As COO and Head of Product, Peters spearheaded the rollout of advertising services and was promoted to Co-CEO alongside Ted Sarandos. Netflix co-founder Reed Hastings was co-CEO with Sarandos and is now chairman.

When asked about introducing a free, ad-supported service, Sarandos said Netflix is ​​”open to all of these different models, but we have a lot in store for this year.”

This includes advertising products as well as future Expanding paid sharing options and an extensive content slate.

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