Netflix shined its crown as the reigning sovereign of the premium streaming-video world in the second quarter of 2024. It turned in another enviable report, packing on 8 million new subscribers (a record Q2 gain) to stand at 277.7 million worldwide. Netflix topped sales and profit targets, too, and upped full-year 2024 revenue and margin forecasts. The cherry on top: The streamer crowed about its whopping 107 Emmy nominations, leading this year’s field.
“This is what winning looks like,” Pivotal Research Group analyst Jeff Wlodarczak wrote in a note Friday about the Q2 results. MoffettNathanson’s Robert Fishman told clients, “We do not see any rough seas ahead for Netflix.”
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The one cloud amid this otherwise sunny outlook? Netflix’s still-nascent advertising biz is struggling to monetize a growing user base.
The company says its cheaper, ad-supported plans (available in the U.S. and 11 other markets) are popular: Members on ad tiers climbed 34% in Q2 sequentially, and they now account for over 45% of all signups in Netflix’s ads markets. The problem is that total ad sales — which Netflix hasn’t reported — have failed to keep pace with rising viewership, which the company says averages nearly two hours per day per member.
“We’re racing behind, essentially, to fulfill all of that increasing inventory and we’re lagging in that regard,” co-CEO Greg Peters said on Netflix’s Q2 earnings interview Thursday.
In early 2022, after years of insisting advertising had no place on Netflix, execs finally conceded they needed an ad-supported play on the heels of a rare drop in subscribers. Morgan Stanley projects that Netflix’s ad biz will hit $7.1 billion by 2027 ($3.1 billion in ad sales, $4 billion in subscriber fees), representing 13.5% of its total projected revenue — still relatively small, but an increasingly important contributor to the pie.
“We believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025,” Netflix said in its Q2 shareholder letter. However, the company added, it doesn’t expect advertising to be a “primary driver” of revenue growth in 2024 or 2025: “building a business from scratch takes time.” This May, Netflix said at its upfront presentation that the ad tier had 40 million global monthly active users —up from 23 million in Januaryand 5 million a year ago — but didn’t break that down by geography.
Alongside the Q2 earnings, Netflix announced that Madison Avenue veteran Peter Naylor was departing as head of ad sales. It was another sign the company sees the need for new leadership, after Netflix replaced ad boss Jeremi Gorman last fall with Amy Reinhard, former head of studio operations.
Netflix is now building an in-house ad tech platform that it plans to start testing in Canada in 2024 and launch more broadly in 2025, it said in the shareholder letter, as it moves on from its original partner, Microsoft’s Xandr. It’s also expanding ad-serving partners this summer to include the Trade Desk, Google DV 360 and Magnite. And Peters said Netflix is working to be able to deliver better ads relevancy, targeting and measurement.
“Advertisers want us to have all those features in place today,” Peters said. “The biggest negative feedback we get is that we aren’t there right now.”
Peters continued, “We’ve got the hard work ahead of us of building those as quickly as we possibly can and closing that gap as soon as we can… Quite frankly, as we build those features, I am quite certain that there will be more that will come on to the roster that advertisers will be asking for us and more than we’ll go be excited about doing.”
There’s no reason to doubt that Netflix will be able to successfully fortify its ad operations. But as MoffettNathanson’s Fishman put it, “the onus is now on Netflix to build out its ad sales, measurement and tech capabilities necessary to grow this business for the long term.”
