Netflix touted strong momentum for its push into advertising, claiming subscribers on its ad-supported tier nearly doubled in the second quarter of 2023. However, the streamer said, advertising revenue in Q2 was still not material in the context of its overall business.
The company announced Q2 earnings Wednesday. Overall, Netflix netted 5.9 million new paid subscribers, amid its broader crackdown on password-sharing violators.
On the ad front, “While we continue to grow our reach — ads plan membership has nearly doubled since Q1 — it’s still off a small membership base, so current ad revenue isn’t material for Netflix,” the company said in its quarterly letter to shareholders. “Building an ads business from scratch isn’t easy and we have lots of hard work ahead, but we’re confident that over time we can develop advertising into a multibillion-dollar incremental revenue stream.”
In mid-May,Netflix said it had signed up more than 5 million members for its ad-supported plans, with 25% of new subs taking the package.
Netflix launched the ad tier eight months ago in partnership with Microsoft, coming after years of execs insisting they had no intention of going into the advertising business. The company’s Standard With Ads plan ($6.99/month in the U.S.) debuted in November 2022 in 12 markets.
“We’ve got a long way to from where we are today to even getting to 10%,” i.e., an advertising revenue stream that is 10% of total revenue, CFO Spence Neumann said on the Q2 earnings interview. He said the 10% mark is “a bar we’re shooting for hoping to meet or beat over time.” Co-CEO Greg Peters added that Netflix is targeting the pool of brand-focused linear TV ad dollars first and longer term expects to increasingly take share of digital ad spending as well.
In Q2, as in the previous quarter, Netflix’s advertising tier generated higher average revenue per user (ARPU) overall than the Standard ad-free plan ($15.49/month), implying more than $8.50/month in ad revenue per subscriber, Neumann said.
Also on Wednesday, Netflix killed off the lowest-cost option with ads (the Basic plan, $9.99/month in the U.S.) for new members in the United States and the U.K. in a bid to drive up subscriptions to the ad-supported service. The Standard With Ads tier provides viewing on up to two devices simultaneously but does not provide offline viewing or the option to add an extra member. The plan serves an average of 4 minutes of unskippable ads per hour.
Netflix says about 95% of its total film and TV lineup on average globally is available on ad-supported plans, with the rest unavailable “due to licensing restrictions.” Netflix’s ad-supported plans currently are available in the U.S., U.K., Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico and Spain.
Meanwhile, in May Netflix started alerting customers in the U.S. and other countries thatusers on their accounts who live outside their households would either need to be added as an “extra member”or pay for their own subscriptions — otherwise, the company will begin to block access to unauthorized devices. In the U.S., an extra member add-on is $7.99/month on top of the cost of a Standard or Premium plan.
The company said cancelations stemming from its rollout of paid sharing were “low” and that “while we’re still in the early stages of monetization, we’re seeing healthy conversion of borrower households into full paying Netflix memberships as well as the uptake of our extra member feature.”
After the May launch of paid sharing in 100-plus countries, which represent 80% of its revenue base, Netflix said starting Wednesday (July 19) it will “start to address account sharing between households in almost all of our remaining countries.” In those remaining markets, the streamer is not offering an extra member option “given that we’ve recently cut prices in a good number of these countries (for example, Indonesia, Croatia, Kenya and India) and penetration is still relatively low in many of them so we have plenty of runway without creating additional complexity.”
