Netflix 2Q23 Results; Readthroughs For Advertising
Netflix is growing as a supplier of advertising inventory, and generally is viewed very favorably by marketers at this stage of its development. However, as I discuss below, the ongoing growth of Netflix - and consumer preferences for its ad-free products - continue to contribute to the deterioration of health of the traditional TV advertising business. But first, some updated context.
On Wednesday, Netflix reported 2Q23 results with subscribers rising 8% year-over-year and constant currency growth rising 6%. By contrast, in 1Q23 subscribers were up 5% and constant currency revenue was up by 8%. In the two biggest regions, the US & Canada and EMEA, constant currency revenue growth per subscriber was stable, up 1% and down 1%, respectively. Subscribers were up year-over-year in those two regions by 3% and 9%, respectively. Globally, average revenues per member were down by 1% in constant currency terms.
In light of efforts to eliminate password sharing in the past couple of quarters, we can see how 2Q23 growth was skewed towards lower-tiered subscription offerings along with a change in weightings of revenues to regions where subscription costs are lower. Paid sharing, which has now rolled out to 80% of the subscriber base, would not have been a factor in the subscriber growth trends, as extra member sub accounts are not included in paid memberships (although they would contribute positive to revenues per membership). Further, management has indicated that ad-supported plans generate more revenue than the closest equivalent ad-free plans, so implicitly this factor was not a drag on the results. Only limited commentary was provided by the company although recent data from Antenna for the United States shows that close to 20% of new subscribers are choosing Netflix’s ad-supported plan.
Meanwhile, cash content costs were down again significantly, falling by 21% year-over-year. The company, which paid $17 billion for content last year is likely to spend less this year, especially with ongoing (and likely prolonged) labor actions in the US. They are planning to return to 2022 levels next year.
In general I have observed that a company’s viewing share of television is related to their share of spending on programming. With growth likely to occur beyond 2024 while many owners of traditional video services attempt to hold the line or cut their overall budgets for linear and streaming on a combined basis, Netflix will inevitably expand its share of consumption of professionally produced video content in streaming environments for the foreseeable future. In the United States that figure would have approached 10% during the second quarter if we adjust Nielsen’s calculated viewing data to exclude viewing of YouTube and video game consoles on TV sets. That’s up by more than two-thirds over the past two years.
To the extent that the company does so and only a modest share of it subscriber base chooses ad-supported tiers, ongoing erosion in the potential reach capacity of television will continue (i.e. if Netflix suddenly had 20% of subscribers on ad-supported tiers, with 10% of total professional TV viewing, we could argue that Netflix accounts for a loss of 8% of ad-supported viewing along with a significant amount of audience reach. These figures will undoubtedly continue to grow with time as Netflix increase its share of spending on content).
Comments on advertising reiterated that Netflix’s current focus remains firmly on capturing shares of linear TV budgets, as I believe is true for almost all of the connected TV world. Competing for a broader pool of digital advertising budgets may be an aspiration for Netflix and others in the long-run, although I note that traditional TV environments (including those sold by streamers) are unlikely to capture meaningful digital budgets any time soon.
Larger-scale suppliers of premium video inventory are positioned to compete for those budgets in part, but only where they can apply their unique assets in the advertising world to broaden their businesses – for example, by appending data about consumers to a broader pool of non-television-based media inventory. It is unlikely that many digital advertisers facing a plethora of options through conventional digital channels will consider TV inventory as an extension of their existing campaigns. It’s more likely that advertisers who today are digital only will grow their businesses or evolve their marketing strategies to a point where they believe a business objective can be satisfied using television-related inventory, and therefore would look like any other TV advertiser. Netflix, like others, would be able to compete for a share of this spending in rough proportion to their share of gross ratings points in a given country’s TV marketplaces.