Netflix ‘years away’ from big ad platform as subscriber growth wows market

Netflix ‘years away’ from big ad platform as subscriber growth wows market

Netflix concluded 2023 with a bang after gaining over 13m additional subscribers during Q4 — significantly more than expected.

The streaming veteran now has a total of 260.3m subscribers.

Last night’s Q4 earnings announcement was praised by Wall Street, with shares of Netflix ticking up over 8% in after-hours trading.

Netflix generated $8.8bn in revenue during the festive season (+12.5% year on year). It has big ambitions for the current quarter, anticipating 13% growth, which translates to over $9bn in revenue and nearly $2bn in net profit.

Analysis: Streaming giant still finding its advertising feet

What was perhaps most impressive about Netflix’s subscriber growth was the substantial uptick in developed markets like the US and Canada (up 8% year on year) and Europe, Middle East and Africa (up 16%).

As The Media Leader has previously pointed out, Netflix still has a lot of headroom to grow in other markets — Latin America was up 10.3%, while Asia-Pacific jumped 19%.

It has apparently achieved this despite significant price hikes, thanks to a widely publicised crackdown on users sharing passwords and a more aggressive pricing strategy to encourage consumers to either take the cheaper option with ads or pay more for ad-free. Just this week, Netflix announced that existing Basic subscribers would be forced to make this choice, as well as new Netflix users.

Indeed, Netflix’s leadership team cited price increases and subscriber gains as reasons it would see “healthy” double-digit revenue as well as improvements in profitability this year. That must mean it expects a surge in demand, thanks to better marketing, or having better content in the long-running “streaming wars”.

As for advertising being a major contributor to the top or bottom line? Not for a while, stressed co-CEO Greg Peters in last night’s earnings call.

Peters said Netflix is “years away” from ad revenue being material to the overall business. Which is why it does not have to disclose an ad revenue number in its financial results as a listed company.

The ad industry analyst Brian Wieser has suggested that Netflix is operating at a $1bn annualised level in the US, with presumably several hundreds of millions more outside the US.  

Even if one puts that estimate at $2bn — that’s peanuts for Netflix. This is a company with a $215bn market capitalisation — the share price movement alone (more than 10% after the US market closed last night) dwarfs the $2bn extra ad revenue it could make this year. 

Successful forays into advertising

“We believe there is a lot of room for growth with the expansion of streaming,” said Peters and fellow co-CEO Ted Sarandos in the statement.

“If we continue to improve Netflix faster than the competition, we will have a company that will be increasingly valuable — for consumers, creators and shareholders.”

The duo also praised the launch of the cheaper subscription plan with advertising that is expected to generate “long-term profits”.

For the October to December period, the net profit of the California-based company fell slightly below expectations at $938m instead of $990m, but it was significantly higher than the $55m from the same period the previous year.

Netflix had already gained nearly 9m subscribers during the summer, thanks in part to its stricter policy on password sharing among users.

At the end of 2023, the final series of shows including Sex Education and The Crown attracted large audiences, as did Berlin, a series set in the universe of the hit series La Casa de Papel, plus Squid Game: The Challenge, a reality-TV show inspired by Korean phenomenon Squid Game.

The latter will be returning to the platform in 2024 with a second series.

“Despite the strikes last year that delayed the release of certain titles, we have a substantial and bold programming line-up for 2024,” the company noted.

Like its competitors, Netflix can now resume producing new content in the US since the end of the historic Hollywood strikes in November.

The industry was paralysed for six months by simultaneous strikes from screenwriters and actors, who demanded wage increases and safeguards in AI.

However, the major streaming services assured that the impact of the strikes would be limited, especially as they incidentally allowed them to save money.

While Disney+ is still figuring out how to achieve profitability, Netflix’s operating margin for its entire fiscal year 2023 came in at 20.6%, surpassing its own forecasts, and the Los Gatos-based company expects it to improve further in 2024.

Netflix invests in sports rights

This is enough to allow Netflix to further expand into other entertainment fields already occupied by its competitors, such as sports.

The company announced on Tuesday that it has reached a 10-year broadcasting agreement with the professional US wrestling league WWE for a fee of $5bn.

Starting from 2025, Netflix will have exclusive rights to Raw, WWE’s flagship show, which ranked among the top cable TV ratings last year in the US.

This is a major step for the platform, which had so far remained relatively behind in the race for sports broadcasting rights.

Amazon recently entered this market, while Disney, through its subsidiary ESPN, Warner Bros Discovery and its Max platform, and Peacock, a subsidiary of NBCUniversal, already controlled significant rights portfolios that bolstered streaming offerings.

Additional reporting by The Media Leader France

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