During Thursday’s Q2 earnings call, Netflix officials discussed a redesigned homepage aimed at improving content discovery for users, along with excitement connected to its advertising business targeting subscription tiers with streaming ads.
Netflix Co-CEO Greg Peters said during the call that continually enhancing the member experience is an ongoing priority.
“The key to our success is quality at all levels,” he noted. “It’s great movies, it’s great TV shows, it’s great games, its great live events, and a great and constantly improving recommendation system that helps unlock all of that value for all of those stories.”
Peters said there has been an increase in the “diversity of entertainment that we are now offering. We’ve been amazing at films and series for a long period of time. But now increasingly, we’re adding live events (like The Tom Brady Roast and WWE). We want to increasingly recognize that we’re doing different jobs for our users at different moments. It’s that type of flexibility we want to provide.”
Netflix reported a 34% increase in ad tier memberships as part of its ongoing efforts to expand its advertising business. Netflix is also actively developing an in-house ad tech platform, set to undergo testing in Canada starting in 2024, with plans for a wider rollout by 2025.
“Ads fulfill two key strategic goals,” the company wrote in a Thursday (July 18) shareholder letter. “They allow us to offer lower prices and create an additional revenue and profit stream for the business.”
The letter highlighted the ad tier’s attractiveness, citing its $6.99 monthly price point and the phasing out of the Basic plan in certain markets. This strategy has boosted ad memberships by 34% sequentially in Q2.
“We believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025,” the company added, “creating a strong base from which we can further increase our ad membership in 2026 and beyond.”
Ad revenue is “growing nicely” and 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.”
One of the issues is “we’re scaling faster than our ability to monetize our growing ad inventory. It’s why continuing to build our ad sales, measurement and tech capabilities is so important. Based on everything we’ve learned and our progress over the last 18 months — we’re confident that advertising will be a key component of our longer-term revenue and profit growth.”
During the earnings call, Peters said that Netflix advertising is a “revenue growth opportunity for us. As we scale into that, we think about pricing for our ads tier very similarly to how we would think about pricing for our non-ads tier. We love having an entry price that’s lower. That means we’re more accessible for more people in our ads market. That’s a great thing because they get access to all the amazing storytelling that we’re doing there.”
In terms of raising that price, Peters said the company thinks about it like it would pricing in general.
“It’s our job to increase the value we are delivering to all our members,” he said. “We have more amazing films, more series, live events that are coming, more games. When we have signals from our members, the amount of acquisition we have going, engagement, what our retention and churn looks like, then we find the right moment to ask our members to pay a bit more to keep that fly wheel spinning and we’ll think about that in the ads context just like we would in the non-ads context.”
Peters said the company is excited about the future advertising prospects.
“There’s a lot of excitement among advertisers about the work that we’re doing,” he noted, “being able to provide advertisers more ways to buy on Netflix. Increased ad relevancy targeting personalization, better measurement, incrementality. All the things we’ll be building over the next several years. The biggest negative feedback we get is we aren’t there right now. We’d love to have all those features in place today.”
But the process is ongoing, Peters said, adding: “We’ve got the hard work ahead of us building those as quickly as we possibly can and closing that gap as soon as we can. It’s years ahead of us to go ahead and keep building these things. As we build those features, I’m certain there will be more that will come onto the roster that advertisers will be asking from us and more that we’ll be excited to do.”
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