In a third-quarter earnings interview dominated by talk of advertising, top Netflix execs described it as a “sprint” to capture “a whole new audience” and a bid to woo advertisers affected by “the collapse of linear television.”
COO Greg Peters, who is leading the ad push, was asked by moderator and J.P. Morgan analyst Doug Anmuth about whether many subscribers to the ad-free tier would trade down to the ad-supported one. Any resulting loss of subscriber revenue could offset gains from advertising. The new Basic with Ads plan will cost $6.99 a month, compared with $15.49 for the most popular ad-free plan.
“We don’t see a lot of members switching plans,” Peters said. “Oftentimes, when they come in for a specific feature, let’s say 4K resolution, we see that to be a fairly sticky choice.” If those patterns hold true in the new advertising phase, he added, the company anticipates “unit economics being neutral to positive.” The cheapest plan has certain limitations — only one stream at a time, no downloading 720p resolution (compared with 1080p for the most popular plan).
The remarks came after Netflix reported better-than-expected results for the third quarter, including the addition of some 2.4 million subscribers, more than double what Wall Street expected.
Peters said the prevailing incentive is increasing the overall subscriber tent, not to favor one class of subscribers in particular. “We’re not trying to steer our members to one plan or another,” he said. “We’re trying to take a pro-consumer approach and let them find and land with the plan that’s right for them.”
Repeatedly during the 40-minute earnings interview, execs emphasized their scramble to ramp up the ad venture (with help from Microsoft) in just six months, conceding that their ad-peddling methods will strike some as pretty basic at the beginning. Targeting capabilities — the main lure for advertisers looking to take advantage of digital inventory compared with linear TV — will be “consistent with television” at launch, Peters conceded.
In terms of competition, Netflix at the start will compete more for linear TV ad dollars than the hauls taken in by digital giants like Google or Meta. “A lot of what makes digital attractive will be added over time,” Peters said. “We’re going to access a bunch of the capabilities that you’ve seen us leverage over the past 10 years” in building an algorithm-based offering. Even though the initial experience is straightforward, about five minutes’ worth of 15- and 30-second ads each hour and data on age and gender, Peters reasoned, “we don’t need to stay there.”
Co-founder and Co-CEO Reed Hastings recalled former Disney CEO Bob Iger saying at last month’s Code Conference that linear TV is “going off a cliff,” a sentiment which resonated with Hastings. “What I under-appreciated was just the impact on advertisers,” of the entry of major players like Netflix (and, in two months, Disney) into the ad arena. “They’re just being able to reach fewer people, and then the effect on the 18-to-49 demographic is even faster than the decline overall. … What is really fueling the cycle is the collapse of linear TV as an advertising vehicle.”
Addressing subscriber growth and other positives in the financial report, Hastings called the subscriber numbers “reasonable, not spectacular.” (And, indeed, the 2.4 million new subscribers was well below the addition of more than 4 million in the third quarter of 2021.) Still, for a company that’s been down, delivering a pleasant surprise — on the eve of the landmark advertising entry — elicited more than a few exhalations of relief. “Thank God we’re done with shrinking quarters!” Hastings practically shouted, with a smile.