Disney last week announced plans to introduce an ad-supported subscription tier to its Disney+ streaming service, but Netflix says a similar option for its own customers isn’t on the table for the time being. Speaking at the Morgan Stanely Technology, Media, and Telecom Conference this week, Netflix CFO Spencer Neumann explained that, while Netflix isn’t necessarily against advertising, leaning into an ad-supported model is “not something that’s in our plans.”
The question that had been put to the exec was about whether Netflix could see using advertising as a way to lower the entry price point for its service. Doing so would be something that could help Netflix compete as it works to establish itself in more global markets, including those that are more price-sensitive — like India, where Netflix recently lowered its member pricing.
But Neumann defended the streamer’s current subscription model, saying that Netflix is focused on “optimizing for long-term revenue…and we want to do it in a way that is a great experience for our members.”
The underlying thinking here seems to be that introducing ads may indeed help bring the cost of a subscription down, which could in turn attract more subscribers, but it could also mar the end-user experience. Of course, the CFO hedged a bit in case Netflix’s plans ever changed on this front, adding that if the company figures out a way to make a play in the ad-supported space where it can still meet the goal of offering a great user experience, then perhaps it would do so. “Never say never,” he said.
“Right now, we think we have a great model and a subscription business that scales globally really well,” Neumann said. “We were about a $20 billion revenue business two years ago…we’re $30 billion revenue now. The growth is healthy across every region of the world.”
Of course, this bluster may not fully reflect the state of Netflix’s business. Investors today are debating to what extent Netflix should chase more near-term growth, even if it means adding advertising to its service to lower pricing. And Netflix just missed Wall Street estimates for subscriber growth in its Q4 2021 earnings. The comapny had argued at the time the drop was temporary and reflected the later-in-the-quarter launches of some of its more anticipated shows, like the second season of the popular “Bridgerton.” But it also admitted in its shareholder letter that the increased competition from rival streamers “may be affecting our marginal growth.”
Today, Netflix faces a lot of newer competition, including from Disney+, HBO Max, Paramount+ and NBCU’s Peacock, in addition to older rivals like Hulu and Prime Video.
Paramount+ and Peacock launched with ad-supported options. Hulu offers plans both with and without commercials. And HBO Max rolled out its ad-supported subscription last year. Now, Disney+ is getting on board. That leaves Netflix nearly alone among top streamers without a lower-cost, ad-supported plan. And while it’s true that Amazon’s Prime Video doesn’t run ads, it’s also a part of a very different business model. Prime Video is just a piece of a much larger, more expensive subscription service that includes a lot of other perks, led by Amazon’s faster shipping option.
Neumann acknowledged the competition could impact Netflix’s thinking on advertising at some point.
“It’s not in our plans, but other folks are learning from it. So it’s hard for us to ignore that others are doing it,” he admitted. “But, for now, it doesn’t make sense for us.”
The CFO also spoke to other aspects of Netflix’s business at the conference. He noted that Netflix’s recent pullout from Russia following Russia’s horrific invasion of Ukraine was a decision made, most importantly, due to the “real human suffering” that was taking place amid the war. But from a business standpoint, the sanctions, regulatory issues and challenges around payments in the country also made it too difficult to operate there, related to the opportunity. Russia, he said, represented less than 1% of Netflix’s revenues.
The exec was also briefly questioned on Netflix’s emerging games business, which Neumann characterized as being in the very early days. Its first 12 months had been focused on “just getting the plumbing right,” in terms of the infrastructure to host and distribute games to the app stores globally. Now, the company is working to learn what games look like in terms of retention and hours played, and how members value games versus film and TV.
He added that Netflix so far has released some 14 games on the service to date, but it expects to have “a multiple of that” by the end of the year, indicating the company’s plans for a faster rollout of new titles.