Some streaming services provide users with an option to select a lower-priced tier with ads. Hulu and Peacock are two such examples. Netflix executives, however, have said on numerous occasions that the company will never embrace advertisements. Analyst Michael Nathanson of MoffettNathanson Research, however, recently issued an investor note arguing that Netflix might want to reconsider its position.
According to Nathanson, Netflix is experiencing slower subscriber growth. Consequently, Netflix needs to come up with additional revenue streams to keep investors happy.
Netflix ads would provide an additional revenue stream
“Of course, having a business that generates $25+ billion in annual recurring revenues growing mid-teens is more than admirable, but we are seeing signs that Netflix is looking to build a new profit pool or two à la Disney,” Nathanson explained. “Yet, we don’t think that consumer products or gaming will be enough to change the narrative. Rather, we think that an ad-supported tier or live sports would be the way to go to penetrate harder to reach customer segments and markets, especially in low-ARPU emerging regions.”
Nathanson raises an interesting point, which is to say that subscriber growth can’t continue to increase indefinitely. At a certain point, everyone who wants a Netflix subscription will have one. In turn, Netflix will need to come up with some new and creative ideas in order to boost revenue. In years past, Netflix has managed to address the issue by implementing modest subscription price increases. And though Netflix is still impressively cheap, the company will eventually reach a price ceiling and will be unable to rely on a subscription hike as a revenue driver.
The good news, from Netflix’s end, is that the company still has a lot of room for growth outside the U.S. That said, Netflix currently isn’t in a position where it needs to enact drastic measures to boost revenue. Still, it’s a looming issue that Netflix executives are undoubtedly trying to prepare for.
Should Netflix embrace live sports programming?
Interestingly, Nathanson adds that Netflix embracing ads might be viewed as a sign of weakness. Consequently, Nathanson posits that an alternative strategy might be for Netflix to add live sports programming to its service. Amazon, if you recall, implemented a similar strategy when it secured the rights to NFL Thursday Night Football.
It remains unclear, however, if the revenue Netflix would make from live sports would offset the cost of a licensing deal. On a related note, Netflix VP of business development Maria Ferreras went on record in 2018 and said Netflix has no interest in carrying live sports.
“I think in terms of live sports there’s nothing we can do differently from a television broadcaster, so it doesn’t add additional value,” Ferreras told Variety. “You can never say never, but there’s no plans to go into that.”
Additionally, Netflix CEO Reed Hastings added that the company is currently prioritizing movies and TV shows.
“Right now, Ted’s got every billion dollar earmarked for bigger movies, bigger series, animation of course,” Hastings said. “At least for the next couple of years, every content dollar is spoken for.”
Netflix executives aren’t fans of advertising
Netflix executives have adamantly stated that ads will never be part of a subscription.
“It’s a judgment call,” Netflix CEO Reed Hastings said about ads. “It’s a belief we can build a better business, a more valuable business [without advertising]. You know, advertising looks easy until you get in it. Then you realize you have to rip that revenue away from other places because the total ad market isn’t growing, and in fact right now it’s shrinking. It’s hand-to-hand combat to get people to spend less on, you know, ABC and to spend more on Netflix. There’s much more growth in the consumer market than there is in advertising, which is pretty flat.”