While Netflix has historically been sheepish on ads, one media analyst thinks an about-face is the only way for the streaming giant to grow.
According to a report by NextTV, MoffetNathanson Research analyst Michael Nathanson thinks Netflix needs to consider advertisements in order to reboot slumping subscription numbers.
“Although Netflix management continues to strongly dismiss the idea of advertising, we think that view will be seen as a strategic mistake if future rates of subscriber growth start to fall short of Street expectations,” Nathanson said.
Nathanson also suggests that Netflix’s new course of action, including direct-to-consumer video brands and gaming, is motivated by Disney, now the company’s biggest rival. “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 said.
Should Netflix decide to pursue AVOD, Nathanson says they could be poised to best capture the emerging market. “Given Netflix’s popularity, it appears they should be the best positioned to capture the emerging AVOD market if they embrace advertising,” Nathanson said.
Netflix
Netflix is a subscription video streaming service that includes on-demand access to 3,000+ movies, 2,000+ TV Shows, and Netflix Originals like Stranger Things, Squid Game, The Crown, Tiger King, and Bridgerton. They are constantly adding new shows and movies. Some of their Academy Award-winning exclusives include Roma, Marriage Story, Mank, and Ma Rainey’s Black Bottom.
Netflix has opposed ad-supported streaming for years, citing privacy and tracking concerns. But as it quickly becomes the only streaming service to not offer a less expensive, ad-supported tier, execs within the company may see the writing on the wall and change course. Granted, Netflix’s “main” rival Disney+ is still ad-free, so Netflix may yet hold out for longer, but services like HBO Max, Paramount+, and Peacock have added ad-supported tiers recently — and are quickly coming for the throne.
Sports also offer a new opportunity for Netflix, according to Nathanson. “While an ad-supported tier may very well boost growth, it may also send a worrisome signal to the market that Netflix’s core SVOD strategy is facing its limitations. Accordingly, we believe another route Netflix could take to spur growth and also gain exposure to the strong advertising market is by adding sports content to the service,” Nathanson said. Nathanson thinks Netflix can add sports to a “premium” tier to boost ad dollars and gain exposure to in-game advertising. The trio of HBO Max, Paramount+, and Peacock all feature live sports, and Disney has the “Disney Bundle” that features Hulu and ESPN+, leaving Netflix as the only one without a sports date to the dance.
Nathanson concluded his note with one final statement: “Although advertising or sports on Netflix is purely conjecture at this point, we believe management will need to consider more aggressive actions to drive growth to support their elevated equity valuation, especially as the core SVOD business begins to slow down. Consumer products appear to be the first step towards broadening the business beyond subscription streaming, yet we do not believe it is enough by itself to change the long-term financial profile for the company.”