Netflix’s ad business is scaling its audience and inventory faster than its ability to monetize inventory, CEO Greg Peters told shareholders during the company’s earnings call on Thursday.
Although ad revenue won’t be a primary driver of revenue anytime soon, Peters and CFO Spencer Neumann said they are confident that a slower growing ARM (average revenue per membership) in the short term will give way to long-term success.
Overall, revenue grew 15% to $9.8 billion YOY during the last quarter – down slightly from 17% YOY growth in the previous quarter, but close to double the growth rate from 2023. Operating margins hit almost 30% compared to 22% last year, an increase of over 6%.
Netflix predicts these two performance indicators will hold at roughly the same rates during the end of 2024. But looking forward to 2025, ad revenue in particular will likely double year over year – “albeit off a small base,” Peters said.
Already, ad-supported plans account for 50% of new sign-ups across the 12 countries where the plans are currently available, and ads memberships are up 35% quarter on quarter.
Engagement rates, which average out to two hours a day per paid membership, are also similar across both ad and non-ad plans. (The content that both member bases seek out is similar, too, co-CEO Ted Sarandos noted.)
The majority of next year’s growth will continue to come from its 282.7 million memberships, not ads, said Neumann.
Contrary to analyst predictions, Netflix has no plans to raise prices in the US. Instead, it’s choosing to finally phase out its “Basic” ad-free plan at the beginning of Q2. People on the $11.99/month basic plan had to switch to the $6.99/month ad-supported version or pay $3.50/month more for the ad-free tier.
“The principal goal here is a more effective way to give members and members-to-be a lower price plan to access all of that great entertainment,” said Peters of the current business model.
Rolling out new ad tech
Netflix’s in-house first-party ad server, which was announced ahead of this year’s upfronts, is still on track to launch next month.
Canada will test-drive the nascent ad tech platform, then Netflix will expand to the other 11 ad-capable countries in 2025.
In the meantime, current programmatic partnerships with The Trade Desk and Google DV 360 are evidently going well, and the company has already learned a lot about the ad market over the last two years since it first launched its ad-supported tier.
“More demand creates positive pressure on CPMs. More channels mean it’s easier for more clients to buy,” Peters added.
Netflix is already live with one-to-one private marketplaces in both North American and Latin American markets and has developed several always-on agency deals in the US and Australia, he said.
Next, the advertising team plans to add more programmatic capabilities in the US, Canada and Latin America over the following month, and “building from there,” Peters said.
“We’ve got a road map for more formats, for more features, for more measurement. That’s all coming,” Peters said.
“We have a ton of work to do, and it’s seemingly new to us,” Sarandos said, referencing Netflix’s new-kid-on-the-block reputation in the CTV ad market. “But what’s great about it really is that it calls on all of our deepest skill sets, both technologically and creatively.”
