Netflix believes ads will eventually drive at least 10% of revenue

• Netflix said it is pleased with early progress on an ad-supported tier that launched in November while acknowledging that scaling the business will be a time-intensive process, according to a fourth-quarter earnings statement. 
• On a call discussing the results, analysts asked about the platform giving some money back to brands. Executives emphasized that Netflix is still very much still in the “crawling” phase of its “crawl, walk, run” approach but noted that user engagement signs are promising and comparable with that of its ad-free tiers. 
• In the months ahead, Netflix is prioritizing improvements in ad delivery validation, measurement and targeting while refining its sales and operations processes with Microsoft. The company believes that advertising could become “at least 10%” of its $30 billion-plus take in annual revenue, and maybe even more. 

After a rough start to 2022 that saw subscribers shrink for the first time in a decade, Netflix closed out the year on a strong note, though with questions hanging over whether its push into ad-supported media will pay off. The streamer notched 7.7 million paid subscribers over the period, well above expectations, and saw revenue growth in line with forecasts. 

During the call with analysts, executives compared its fledgling advertising bets to those of Hulu, which has a 10-year head start in the game. About half of Hulu’s membership is now on such a plan, generating billions in revenue and making the platform dominant in the connected TV space. 

“I just want to emphasize, it’s a multi-year path,” said Netflix Chief Financial Officer Spencer Neumann of the ad-supported tier during the analyst call. “We’re not going to be larger than Hulu in year one.”

Neumann later stated Netflix wouldn’t have made the pivot into ads — an area it long resisted — if it didn’t think it could eventually drive 10% or more of annual revenue from the segment. He didn’t offer guidance beyond that. 

In terms of strengths, Netflix highlighted its ability to get the ad-supported tier off the ground quickly and smoothly through its partnership with Microsoft. User engagement also appears similar to the ad-free package, indicating commercials aren’t turning off those who sign up. 

“It means we’re delivering a solid experience and it’s better than we modeled,” said Netflix’s new Co-CEO Greg Peters. A key executive behind the ads strategy, Peters was promoted from chief operating and product officer to co-CEO around the time of the earnings report. He replaces Co-Founder Reed Hastings, who is transitioning to an executive chairman role. 

Netflix has been deliberate about not pushing a heavy ad load on users, limiting commercial time to just a few minutes per hour. AB InBev, L’Oreal Paris and NYX Professional Makeup are some of the early brands testing the service. 

But Netflix was also pressed about already giving money back to advertisers, with Digiday reporting indicating it’s hitting just 80% of its expected audience in some cases. To that end, executives argued that the business is immature and ironing out the kinks.

Netflix is making multiple moves this year to accelerate its advertising transformation. It recently deepened a partnership with Nielsen around measurement and audience insights and will present during the upfronts season, taking a slot that’s historically been held by CBS. 

The upfronts maneuver offers another signal that Netflix is chasing more traditional TV budgets versus those allocated to digital platforms like Google and Meta, which executives still believe would be more difficult to compete against.

“[If] you think about the growing relevance of first-party data and how we do that, those are real big advantages that we can bring relative certainly to the traditional TV world,” Peters said.