Streaming giant Netflix posted another strong quarter in its earnings release last night, revealing that total paid subscriptions rose by 19 million in Q4, reaching 302 million. Revenues meanwhile grew by 16 percent year-on-year, up to $10.2 billion.
The streaming giant’s investments in its ad-supported subscription tier and in live events were both credited by Netflix executives as helping drive this growth. And on an earnings call following the results, co-CEOs Ted Sarandos and Greg Peters and CFO Spence Neumann described how these two pillars are likely to evolve in the coming years.
Scale goals reached
Netflix doesn’t state how many ad tier subscriptions it has overall or how much ad revenue it’s generating in its quarterly reports, But the numbers it does release show that the ad tier is at least having a significant impact in driving subscription growth.
Across markets where the ad tier is available, it accounted for over 55 percent of new sign-ups in Q4, according to Netflix. In North America, Netflix added 4.8 million net new subscribers overall. So if the 55 percent average held in North America, that would mean at least 2.6 million ad tier subscribers signed up in the quarter – but likely significantly more, since 4.8 million is a net figure (i.e total new sign ups minus total cancellations).
It’s worth noting that the Q4 figures may be skewed by the major live sports events which Netflix hosted during the quarter, namely its two NFL Christmas Day games and the Jake Paul/Mike Tyson boxing match. Quarter-on-quarter net subscription growth in North America was the highest it’s been since Netflix started reporting subscriber figures in 2011. While Peters and Sarandos both credited the total Netflix content catalogue with driving this growth, it looks likely that the widely promoted live events had a big impact. And any subscribers signing up specifically for those live events would presumably opt for the ad-supported package, since live events show ads on all subscription tiers.
With that said, the ad tier has nonetheless shown across its first few years that it’s accounting for a significant portion of new subscribers in markets where it’s available. And Peters said on the earnings call that engagement from ad subscribers – another key factor in determining the volume of inventory which Netflix has to sell – is comparable to that of ad-free subscribers. Peters said that Netflix has now “done the work” required to meet its scale goals in 2025.
From crawl to walk
With scale seemingly no longer an issue, Peters says Netflix will enter the ‘walk’ stage of its ‘crawl, walk, run’ advertising strategy. Now, the focus turns to improving the ad experience for advertising partners, and for viewers using the platform.
Netflix’s investment in building out its own ad tech plays a big role here. Netflix’s ad tech is currently being trialled in Canada, where Peters says it’s already driving revenue growth. The tools will be expanded to other advertising markets this year, starting with the US.
“The biggest initial benefit we have of using our own ad server is just enabling us to offer more flexibility, more ways of buying for advertisers, fewer activation hurdles, just improving the overall buyer experience,” said Peters. “And of course, that is meant to drive increased sales and the ease of transacting with Netflix.”
“Over time, the first-party ad tech platform allows us to deliver more critical capabilities to advertisers that we hear from them that they really need,” he added. “So, more programmatic availability. We’re talking enhanced targeting. We’re leveraging more data sources, more measurement, more reporting, more incrementality studies.”
Weighing up live options
Netflix’s investment in live events also feeds into its ad strategy. Ads on live sports are shown to viewers on all subscription plans, not just the ad-supported ones. And sports inventory generally is seen as particularly advertiser friendly, thanks to the mass simultaneous reach and high levels of user engagement it provides.
But Sarandos said that Netflix is still unlikely to make a play for full seasons of big league sports, since the underlying economics are “extremely challenging”. “If there was a path where we could actually make the economics work for both us and the league, we certainly would explore,” he said on the earnings call. “But right now, we believe that the live events business is where we really want to be. And sports is a very important part of that, but it is a part of that expansion.”
For the time being, sports investments are likely to be in the same mould as Netflix’s WWE and NFL streams: cases where the streamer sees an opportunity to attract a larger, younger, and more global audience than linear TV delivers.
