Netflix is having its way with ads, and Wall Street could win too

Netflix Inc.’s growing advertising business is proving that the streaming company’s bet that its customers would tolerate commercials in exchange for a cheaper price is paying off, and Wall Street should win as well.

In November 2022, Netflix launched ad-supported subscription tiers, a complete about-face on its longstanding policy to never have commercials on its service. Some were skeptical that this move, which harkens back to broadcast TV, would work.

But Netflix is proving those naysayers, including this columnist, wrong.

In a livestreamed call after reporting fourth-quarter earnings Tuesday, Netflix

executives said that they saw 70% growth in advertising in the quarter, with 23 million average users (MAUs), a gain of about 8 million from the previous quarter. Executives told Wall Street analysts that the ad-supported tier now accounts for 40% of all Netflix sign-ups.

“And we see that continuing to grow in the quarters ahead,” Netflix co-Chief Executive Greg Peters said.

Earlier Tuesday, Netflix reported a record 13 million new subscribers in the fourth quarter, up from analysts’ estimates of 8.7 million. Its shares surged nearly 9% in after-hours trading.

Also see: Netflix’s ever-shifting content model: Live sports, more gaming, ‘healthy blend’ of licensed shows and original series

Netflix executives said that it was still very early days in the ad business, and that they are going to continue to tinker with pricing structures and other areas it believes are important, including adding new geographies. “So all that work is ahead of us,” Peters said. Revenue from ads is not yet broken out separately.

Earlier in January, Variety had reported that Netflix was going to reach 23 million average users in its ad business, and Mark Mahaney, an analyst with Evercore ISI, said in a note ahead of the company’s earnings that that growth rate would be substantial.

“If this growth cadence continues, Netflix may well reach 50 million MAUs and close to 10% of its subscriber base by the end of 2024,” Mahaney wrote. “Now we’re talking real scale — which could catalyze more significant and permanent ad-budget shift to Netflix.”

And while Netflix executives downplayed the current state of the business, the implication that ads are going to be loom larger for the company was clear. “I’d say we’ve got years of work ahead of us to take the ads business to the point where it’s a material impacter to our general business,” Peters said.

But if and when Netflix is able to improve its overall revenue growth rates due to its ad business, Wall Street is also going to be a clear winner for placing its bets on the streamer — and commercials.

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