In its Q2 report, Netflix stated it’s making steady progress scaling the ads business. Ads tier membership grew 34% quarter on quarter, and Netflix is building an in-house ad tech platform that will test in Canada in 2024 and launch more broadly in 2025. This will give advertisers new ways to buy, insights to leverage and ways to measure impact, it stated.
On the programmatic side, Netflix also plans to expand its capabilities this year to include The Trade Desk, Google DV 360, and Magnite.
Just over 18 months since launch, Netflix continues to scale its ads tier, which now accounts for over 45% of all signups in its ads markets. The company said, “Its attractiveness ($6.99 a month in the US, with two streams, high definition and downloads) — coupled with the phasing out of our Basic plan in the UK and Canada, which we will now start in the US and France — has increased our ads member base by 34% sequentially in Q2.”
For advertisers, in the UK, starting September, Barb will measure Netflix’s ad supported plan, making it easier for clients to plan campaigns and understand their audiences on Netflix. Netflix also has new features like the “pause” or “keep watching” ads and in the two months since the launch of the beta in May, it has closed over 60 pause ad campaigns with big brands like Expedia, Coca-Cola, Ford, L’Oréal and McDonald’s.
The streamer added, “Given this sustained progress, we believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025, creating a strong base from which we can further increase our ad membership in 2026 and beyond. Our ad revenue is growing nicely and is becoming a more meaningful contributor to our business. But building a business from scratch takes time — and coupled with the large size of our subscription revenue — we don’t expect advertising to be a primary driver of our revenue growth in 2024 or 2025.”
The near term challenge (and medium term opportunity) is that Netflix is scaling faster than its ability to monetize the growing ad inventory.
“We’ve been primarily focused on scaling reach. But if you think about even just the revenue portion of ads, it is growing nicely,” said Spencer Adam Neumann, Chief Financial Officer, Netflix, in the July earnings call.
“The rate of growth, it just happens to be growing off of a relatively small base because we’re starting from only 18 months into ads.
So to have the kind of a primary revenue impact across a business that has been primarily subscription for a long time, that just takes
some time,” he added.
Netflix is scaling through reach, through engagement, through growing inventory, and that represents opportunity for
us over a multiyear trajectory to have a big and increasing revenue and profit impact on the business, Neumann said.
“Ads is kind of one more tool in our tool chest there. We’re doing the hard work now to improve our service across the board.”
Across streaming, pay TV, film, games and branded advertising, it’s a $600B+ market, and today Netflix accounts for just ~6% of that revenue.
Neumann added, “We’re small in every measure. We talk about it a lot. We’re small in share of TV time. We’re small in terms of penetration of connected TV homes. We’re small in revenue market share. And we’re going to grow in those areas across the board, and ad is going
to be a bigger piece of that puzzle, just we won’t have it be primary in ’24 or ’25, but it contributes. It’s a meaningful contributor.”
Elaborating on the key areas that need to improve to bring in significantly more revenue, Gregory K. Peters Co-CEO, President & Director, said during the earnings call that the first priority is scale.
“We’ve been scaling our ads member base very quickly from 0 two years ago to where we are today. And we’re excited to say that we’re on track to achieve our critical-scale goals for all of our ads countries in 2025,” Peters stated.
“That allows us to shift more of our energy now on more effectively monetizing that rapidly growing inventory. And there’s sort
of two main fronts here. One is our go-to-market capability. So we’re adding more sales folks, we’re adding more ads operation folks,
building our capabilities to meet advertisers. A big component of that is giving advertisers more effective ways to buy Netflix. It’s a
big point of feedback that we heard from advertisers.”
By adding demand sources that are already integrated into their processes and their systems, that just makes it easy for them to buy, added Peters: “And in some cases, that was a threshold item for them to buy in us, so we’re going to expand the number of buyers as a result of that.”
The other big area of growth for Netflix is the product and technology stack. “We mentioned we’re building our own ads server now. We’re excited to launch that in Canada this year and then the rest of our ads markets in 2025. That unlocks a whole set of innovations that we expect that are focused on a better user experience for our members on those ad tiers and better advertiser features. So think a lot about this as targeting relevance, more capabilities in that space as well as thinking about how do we do ROI, ROAS, incrementality measurements, all the things that we want.”
Ultimately, Peters said, this is about bringing what has been amazing about digital advertising in terms of targeting relevance,
measurement, et cetera, and what we think is amazing about TV advertising, which is an incredible creative format, better creative
format in many cases than digital, as well as the ability to put those advertisements next to content, titles, stories that are impacting
the social conversation, which is important for advertisers.