Netflix Accelerates, Positions Itself to Take More Consumer Spend Share from Traditional Pay TV
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Netflix reported third quarter 2023 results on Wednesday.
Focusing on advertising as I do, I note that while Netflix is a small, if increasingly important supplier of advertising inventory, the company continues to exercise a significant impact on the broader TV ecosystem. This is especially true as it exercises pricing power in terms of subscriber fees, and likely contributes to a reduction in spending on traditional pay TV services.
Netflix 3Q23 results showed paid subscribers rising 10.8% year-over-year – an acceleration over recent quarters for the fastest pace of growth since the first quarter of 2021 – and total constant currency revenues were up 7.8% year-over-year. North America subscribers were up 5.4% while the ARPU was down by 0.5%. In EMEA, the company’s second biggest region, paid memberships were up even more, by 13.9% while constant currency revenues were down by 2%. Overall revenues were up 8% in actual and constant currency terms, with subscribers up by 11%. Looking at the outlook for the fourth quarter of 2023, trends are roughly expected to improve 12% in constant currency terms, undoubtedly aided by price increases.
More specifically, as the company looks to raise prices to capture value from consumers, on Wednesday the company announced that it will be immediately raising prices of its premium plan from $19.99 to $22.99 per month in the US. Although a 15% price increase is significant, I note that it’s likely the case that many – if not most – of Netflix’ subscribers consume enough content to justify this cost given the high volume of time spent with the platform. To the extent that there are concerns regarding subscribers’ capacity to pay for higher priced services – notwithstanding the lower-priced advertising option that may be preferable for some subscribers – I note that there remains a substantial pool of consumer spending on traditional pay TV services (around $100 billion annually in the US) driven by consumers spending more than $100 per month that inevitably is making its way from linear pay TV to streaming video. A 15% increase in revenue in the United States would probably equate to around $2 billion in annual revenue, for example, or around 2% of spending on pay TV presently.
Of course, before even accounting for the price changes, it’s important to note that Netflix’ advertising tier is growing, with 30% of new (not total) subscribers adopting the ads tier vs. around 20% in the second quarter. By inference we can point out that this indicates 70% of new subscribers continue to prefer to pay to avoid ads with their services from Netflix. It’s plausible that higher price points for ad free tiers may persuade more subscribers to choose ad-supported tiers, but it’s far from given. It’s plausible that current levels of gross additions choosing ad-supported tiers reflect new consumers who avoided signing up to Netflix because they were only going to be casual viewers. Those subscribers might turn out to be limited in market size. Overall, I continue to expect that heavier consumers of Netflix will look to avoid experiencing conventional advertising.
In total, the percentage of Netflix subscribers with ads will only be in the single digits at present, and its share of ad-supported viewing will be even lower because of the service’s lighter ad load (which I explored at a broader industry level here). This figure will increase as gross new subscribers who choose ad-supported tiers account for a growing share of the total subscriber base, but this figure is likely capped, and probably will only represent a minority of the company’s subscriber base.
In terms of monetization from advertising, comments reiterated that Netflix’s current focus in the sphere of advertising remains on capturing shares of linear TV budgets, as I believe is true for almost all of the connected TV world. However, in contrast to estimates provided by the company on its earnings release, I note that the TAM (total addressable market) for television outside of China and Russia including connected TV is likely around $150 billion rather than a bigger number which includes YouTube or other forms of video – at least for now. Competing for a broader pool of digital advertising budgets over the long-run is an aspiration for Netflix. Although it probably represents a better way to organize the industry for its sellers and for marketers, I note that it is somewhat removed from the industry’s ways of organizing its budgeting at the present time.
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