Streaming services must juggle subscriber growth and ad revenue – an ongoing struggle that produced a mixed bag of Q4 earnings results.
Paramount gained subs, and Netflix saw a spike in new member sign-ups, while Warner Bros. Discovery had only modest account growth, and Disney (which technically just finished Q1 of its 2024 fiscal year) actually lost subscribers. But, unlike its competitors, advertising is not yet a core revenue driver for Netflix.
The takeaway here is that, when streaming platforms prioritize their ad revenue, their average revenue per user (ARPU) rises. Netflix is alone in reporting a significant uptick in subscribers and not ARPU, because its primary goal is subscriber growth – for now, at least.
ARPU is an indicator of long-term profitability, but it’s far from the sole factor that will determine which streamers come out on top.
ARPU ready?
Streaming subscribers who opt into ads generally have higher ARPU than their ad-free counterparts because advertising is such a high-margin business.
And the more ad spots a streamer can sell, the quicker its ARPU will grow, helping produce the near-constant growth that Wall Street expects.
Last quarter, WBD’s streaming ad revenue jumped by 51% YOY, which would explain why ARPU rose 7%. Disney didn’t disclose ad revenue for Disney+, but its domestic ARPU growth of 9% YOY demonstrates Disney’s dependence on digital ad sales. Paramount’s streaming ad revenue rose 14% YOY while average revenue per Paramount+ user swelled by 31% YOY.
Smart TV companies follow a similar trend. For example, Vizio is profitable thanks to advertising, and with ARPU growth of 15% YOY, it’s no wonder why Walmart wants to buy it.
As for Netflix, ads still aren’t a material source of revenue, which explains why ARPU growth was flat at a mere 1% increase YOY.
Netflix flexes
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But Netflix’s flat ARPU growth is not a sign that the platform is losing to its competitors.
Quite the opposite, actually. There are multiple reasons why headlines keep cropping up this year proclaiming Netflix’s victory in the streaming wars.
A recent piece on Nasdaq.com, for example, calls Netflix’s Q4 results a “comeback” from its low point in 2022, citing revenue growth directly related to new accounts. Netflix grew its member base by 12.8% YOY, the main driver of a 12.5% jump in revenue compared to the previous year.
Netflix’s new ad tier is undoubtedly contributing to rapid subscriber growth when paired with the streamer’s other tactics. For example, Netflix is phasing out its cheapest ad-free plan and kicking moochers off of shared accounts, which is helping funnel new subscribers into its ad-supported offering.
Eventually, ad revenue will follow.
In other words, Netflix is taking a slow-and-steady approach to building its ads business. And while Netflix is pacing itself as it circles the advertising track, so to speak, its competitors are sprinting – and they just might burn themselves out before reaching the finish line. 💨
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