Netflix’s landmark entry into ad-supported streaming, which began last November, is off to a “solid” start and will soon bring in at least $3 billion in annual revenue, executives said.
“The hardest step is that first step as you’re crawling,” Co-CEO Greg Peters said during the company’s fourth-quarter earnings interview. Netflix’s decision to offer a cheaper, ad-supported tier stunned the industry last year, given the company’s adamant assertions that privacy issues and other concerns would keep them from doing so.
Although it is “ridiculously early,” Peters added, “we’ve learned a bunch already.” One important finding is that viewer engagement, he said, is “comparable to similar users on our non-ad plans.” Take rate and growth on the $7-a-month tier is also “solid,” Peters said, “due to incremental subs coming into the service because we have a lower price point.” He reiterated the company’s frequently articulated view that it does not expect customers to switch plans and cannibalizing the existing business of ad-free subscriptions.
“We’re just getting started,” Peters said. “We’re constantly improving and we see the trajectory ahead of us.”
The comments followed the company’s report of fourth-quarter earnings, whose highlight was a sharp increase in new subscribers, well ahead of Wall Street analysts’ growth estimates. Along with the numbers, the company said Peters, formerly COO and head of product, has been installed as Co-CEO along with Ted Sarandos, who has held the title since 2020. Co-Founder and Co-CEO Reed Hastings is becoming executive chairman after 25 years in the corner office.
During the video interview, Hastings suggested that Peters and CFO Spence Neumann deliver an analysis of Hulu’s ad business, which he has name-checked in previous earnings comments. Both chuckled at his Socratic takeover of the conversation. Founded in 2007 as an ad-only joint venture when most streaming occurred on laptops, Hulu today has roughly half of its 42.8 million on-demand subscribers taking an ad-supported plan and brings in about $2 billion a year in revenue for Disney.
“They’ve had a long head start,” Neumann said, noting the U.S.-only reach of Hulu, compared with Netflix’s ad tier being in 12 global territories at launch. (The burgeoning roster of streaming ad players includes Disney+, Pluto, Tubi, Roku and many others.) The exec added that Netflix reaching altitude with ads will be a multi-year process. “We’re not going to be larger than Hulu in Year 1,” he said, “but we would expect to be as large or larger over time, certainly, in just our U.S. market, and more from there.” Directing his comments to Hastings, he added, “We wouldn’t be getting into this business, obviously, Reed, as you know, if it couldn’t be a meaningful portion of our business.”
At nearly $32 billion in total revenue in 2022, Neumann continued, the threshold contribution for the ad tier would be at about 10% of that total in the years to come, or at least $3.2 billion. That guidance generally matches the assessment of a number of analysts and researchers who have tried to put numbers on the new effort.
Asked about the potential to embrace FAST, or free, ad-supported television (as YouTube and many others have done of late), Sarandos said the company has other near-term priorities. “We’re open to all of these different models,” he said, “but we’ve got a lot on our plate this year.”
Along with the advertising effort, pushing further into gaming and shoring up the programming pipeline, Sarandos said limiting password sharing is another key corporate initiative. The company said efforts to recapture lost revenue from sharing will ramp up significantly in the current quarter, but executives didn’t offer many specifics. Delivering sought-after series and films like Wednesday and Glass Onion: A Knives Out Mystery, they said, will be key to the password sharing crackdown. “The must-see-ness of the content will make the paid sharing work, it will make the advertising work,” Sarandos said.
Peters mentioned “casual sharing” as an initial target, which he defined as situations where “people could pay, but they don’t need to, so they’re borrowing someone’s password.” The company’s plan is to “give them a little bit of a nudge and to create features that make transitioning to their own account easy.”
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