One of the oddest elements about the twin shocks
Netflix delivered Tuesday night— a surprisingly grim forecast about subscriber growth plus news that the company is moving toward selling advertising — was the offhand way that CEO Reed Hastings disclosed the reversal of his long-held view that the company should stay out of the ad market.
Hastings raised the issue casually on the company’s earnings call almost as if it were an afterthought. There was no mention of the monumental change in the company’s quarterly earnings letter, which made the news all the more stunning.
Now Wall Street is digesting the implications, both for Netflix and the other companies that will be affected. Shares of other streaming companies that sell ads are under pressure, while ad-tech stocks — the businesses that could help Netflix with its advertising operation — are taking off.
Netflix shares fell 35% to 223.50 on Wednesday.
“Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said on the call. “But as much [as] I’m a fan of that, I’m a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that’s something we’re looking at now. We’re trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice. ”
While Hastings had long resisted the idea, many people who follow Netflix have been calling for the company to include an ad-based tier. On Tuesday’s edition of Barron’s LiveIAB Tech Labs CEO Anthony Katsur explicitly predicted that Netflix would eventually do just that.
Needham analyst Laura Martin has been pounding the table on this idea for months now. She upgraded her rating on the stock on Wednesday to Hold from Underperform, specifically based on the comment Hastings made about ads.
But some analysts seem a little unsettled by the lack of detail on how Netflix will approach the ad market, and the casual nature of the disclosure. LightShed Partners analyst Rich Greenfield wrote that he isn’t convinced Netflix really wants to sell ads, despite the comments on the call.
“Netflix framed advertising as giving consumers choice, but are consumers really asking for advertising?” he said in a blog post. “Certainly many consumers will take the lower cost tier and they will tolerate ads. However, is that the best way to build loyalty and aggregate time spent on Netflix? Does it take away from Netflix’s differentiation with other services? ”
Greenfield also pointed out that Netflix in the past has noted that “advertising forces creators to put cliffhanger moments in the content so you don’t tune out during ad breaks.” Including ads on streaming services generally means people spend less time watching a day, and higher churn, or turnover in the subscriber base, he said.
JP Morgan analyst Doug Anmuth, who conducted the Q&A on the call company the company always chooses one analyst to ask all the questions — cut his stance to Neutral, from Overweight, noting that management “essentially conceded every point of the bear thesis” on the stock. He said he was encouraged about the new position in advertising, but notes that the shift isn’t likely to materialize until 2024. He isn’t yet including any contribution from ads in his earnings model.
MoffettNathanson analyst Michael Nathanson wrote in a research note that he is wondering how Netflix can add a lower-cost ad-supported tier without cannibalizing subscription revenue. He also said the move is clearly a negative for other media companies who had been using advertising as “their hidden advantage in balancing the playing field.”
Nathanson thinks the addition of more premium video ad inventory is likely to pressure pricing for streaming ads overall. “We are not sure why Netflix did not pursue this sooner to limit the revenue growth of their new competitors,” wrote Nathanson, who previously had made the case for Netflix to adopt an ad model.
Another surprising element of the ad strategy is Hastings’ indication that the company will rely on third-party ad infrastructure companies to do the heavy lifting for the shift, rather than building a big ad-sales arm.
“[W]e can be a straight publisher and have other people do all of the fancy ad-matching and integrate all the data about people, ”Hastings said on the call. “So we can stay out of that and really be focused on our members creating that great experience and then again, getting monetized in a first-class way by a range of different companies who offer that service.”
That comment caught the attention of RBC Capital analyst Matthew Swanson, who covers the ad tech companies. One of the largest and most successful subscription streaming services seeing the need and benefit of advertising is major vindication for the long-term CTV advertising market, ”he wrote. Swanson particularly pointed to DoubleVerify (DV),
Pubmatic (PUBM), Tremor (TRMR), and
The Trade Desk (TTD) as potential winners.
That Netflix has conceded the merits of ad-based streaming provides an “I told you so” moment for rival services, but it also turns the company into potentially one of the biggest players in streaming ads. And that is not so good for rivals like
Disney (DIS), Roku (ROKU), Paramount (PARA), and
Warner Bros. Discovery (WBD). All of those stocks were sharply lower on Wednesday.
Among the ad tech stocks, Magnite was up 8%, while The Trade Desk was 6% higher. Pubmatic, Tremor, and DoubleVerify all sported smaller gains.
Write to Eric J. Savitz at email@example.com