One of the weirdest parts of the twin shocks
delivered on Tuesday evening – a surprisingly gloomy forecast on subscriber growth and news that the company is moving towards advertising sales – was the offhand way in which CEO Reed Hastings revealed the reversal of his long-held view that the company should stay out of the advertising market.
Hastings casually raised the issue during the company’s earnings call almost as if it were an afterthought. There was no mention of the monumental change in the company’s quarterly earnings letter, which made the news all the more stunning.
Now Wall Street is digesting the implications, both for Netflix and the other companies that will be affected. Shares of other streaming companies that sell ads are under pressure, while ad tech stocks — companies that could help Netflix with its ad operations — are taking off.
Shares of Netflix fell 35% to $223.50 on Wednesday.
“Those who have followed Netflix will know that I have been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said on the call. “But as much [as] I’m a fan of that, I’m a bigger fan of consumer choice. And allowing lower-priced, ad-tolerant consumers to get what they want makes perfect sense. So that’s something we’re looking at now. We’re trying to figure it out over the next year or two. But consider us quite open to offering even lower prices with advertising as the consumer’s choice.
While Hastings had long resisted the idea, many people who follow Netflix have been asking the company to include an ad-based tier. In Tuesday’s edition of Barron’s LiveIAB Tech Labs CEO Anthony Katsur explicitly predicted Netflix would eventually do just that.
Needham analyst Laura Martin has been beating the table on this idea for months now. She improved her rating on the stock Wednesday at Hold from Underperform, particularly based on the comment Hastings made about the ads.
But some analysts seem a little troubled by the lack of details on how Netflix will approach the advertising market and the informal nature of the disclosure. LightShed Partners analyst Rich Greenfield wrote that he wasn’t convinced Netflix really wanted to sell ads, despite comments on the call.
“Netflix presented advertising as giving consumers choice, but are consumers really asking for advertising?” he says in a blog post. “It is certain that many consumers will choose the cheapest level and tolerate the ads. However, is this the best way to build loyalty and accumulate time spent on Netflix? other departments?”
Greenfield also pointed out that Netflix in the past has noted that “advertising forces creators to put cliffhanger moments into content so you don’t tune out during commercial breaks.” Including ads on streaming services usually means people spend less time watching a day and higher churn or turnover in the subscriber base, he said.
JP Morgan analyst Doug Anmuth, who led the Q&A on the call — the company always chooses one analyst to ask all the questions — cut his stance to Neutral from Overweight, noting that management “essentially conceded every point of the bear’s thesis” on the Stock. He said he was encouraged by the new position in advertising, but notes that the change is unlikely to materialize until 2024. He does not yet include the contribution of ads in his revenue model.
MoffettNathanson analyst Michael Nathanson wrote in a research note that he wondered how Netflix could add an ad-supported tier at a lower cost without cannibalizing subscription revenue. He also said the move was clearly negative for other media companies who used advertising as “their hidden advantage to level the playing field.”
Nathanson thinks the addition of more premium video ad inventory is likely to put pressure on streaming ad prices overall. “We don’t know why Netflix didn’t pursue this sooner to limit the revenue growth of its new competitors,” wrote Nathanson, who previously advocated for Netflix to adopt an advertising model.
Another surprising piece of the ad strategy is Hastings’ indication that the company will rely on third-party ad infrastructure companies to do the heavy lifting for the change, rather than building a large ad sales arm. .
“[W]We can just be a publisher and have other people do all the fancy ad matching and pull in all the people data,” Hastings said on the call. “So we can stay out of that and really focus on creating this great experience for our members and then monetizing it first class through a range of different companies that offer this service.”
The comment caught the attention of RBC Capital analyst Matthew Swanson, who covers ad tech companies. One “of the largest and most successful subscription streaming services, seeing the need and benefits of advertising, is a major justification for the CTV advertising market in the long run,” he wrote. . Swanson particularly highlighted DoubleVerify (DV),
(PUBM), tremor (TRMR) and
The trading post
(TTD) as potential winners.
Netflix’s conceding of the merits of ad-based streaming provides an “I told you so” moment for competing services, but it also makes the company one of the biggest potential players in streaming ads. . And it’s not so good for rivals like
(DIS), Roku (ROKU), Paramount (PARA) and
Discovery of Warner Bros.
(WBD). All of these stocks were down sharply on Wednesday.
Among ad tech stocks, Magnite rose 8%, while The Trade Desk rose 6%. Pubmatic, Tremor and DoubleVerify all posted lower gains.
Write to Eric J. Savitz at [email protected]