Ad-Supported Tier Drives Revenue Growth As Netflix Adds Fewer Subscribers
During April-June, Netflix likely saw its lowest subscriber growth in five quarters, as the initial surge from cracking down on password sharing waned and viewers' attention shifted to summer sporting events like the Euro soccer tournament.
According to LSEG data, the company added approximately 4.82 million subscribers in the second quarter, marking the smallest increase since Q1 2023, and significantly less than the 9.3 million added in the previous quarter.
According to LSEG data, the company added approximately 4.82 million subscribers in the second quarter, marking the smallest increase since Q1 2023, and significantly less than the 9.3 million added in the previous quarter.
Nevertheless, Netflix's strategy to offer a more affordable ad-supported tier has resulted in significant ad revenue growth, with expectations that ad revenue more than doubled in the June quarter.
Overall revenue is projected to have increased by 16.4% to $9.53 billion, the fastest growth since Q2 2021.
Original Netflix shows, including the historical romance "Bridgerton" and the limited series "Baby Reindeer" based on comedian Richard Gadd's experience with a stalker, dominated the most-watched charts in the second quarter, according to Nielsen data.
As Netflix reports its second-quarter results on Thursday, investors will closely examine its efforts to expand the ad-supported plan and seek updates on new growth drivers.
In May, the company announced that its ad-supported tier had reached 40 million monthly active users globally and accounted for 40% of all sign-ups in available markets, up from 23 million in January.
This focus on advertising has been well-received by investors. Netflix's stock has risen nearly 35% this year, compared to a return of about 19% on the S&P 500 index.
During summer months, viewership typically declines for Netflix and rivals like Disney+ as people travel. Analysts also expect the Olympic Games starting July 26 to draw some viewers away from Netflix.
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After significant investment in original content, brokerage MoffettNathanson noted that Netflix is also successful in driving viewership with acquired content from competitors. It highlighted that 18 of the top 20 streamed titles were acquired shows, such as "NCIS" and "Grey's Anatomy."
Netflix has also announced new bundling partnerships. Comcast is offering Netflix along with its Peacock streaming service and Apple TV+ to its Xfinity internet and TV customers.
Additionally, Netflix is increasing its live content offerings, including a deal to stream two National Football League games on Christmas Day, to attract advertisers.
"More live-event announcements will ensue as the company looks to improve its ad-supported time spent, amid an industry-wide reduction in scripted content production," said Ross Benes, senior analyst at Emarketer.
To fuel its next growth phase, Netflix announced plans in May to develop an in-house ad technology platform, providing marketers with more options to purchase commercials and measure performance. Initially, Netflix partnered with Microsoft to establish the foundation of the ad tier .
"Despite this progress, we continue to view advertising as a longer term story and do not expect a material revenue contribution until 2025," said Jessica Reif Ehrlich, an analyst at BofA Global Research, in a note on Monday.
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