Netflix wants Basic with Ads to be as big as Hulu and bring in 10% of revenue

Ted Sarandos and Greg Peters will co-CEO the business going forward while Hastings remains as executive chairman in a reduced role.

Netflix almost doubled subscriber growth expectations in the last quarter, attributed to the appeal of Addams Family spinoff Wednesday and to the tell-all documentary Harry and Meghan.

Despite reporting its first global subscriber shrinkage in more than a decade for the first half of the year, it ultimately grew subscribers by 7.66 million in the final quarter of 2022, which dwarfed its prediction of 4.5 million. After that positive rally, it now sits at around 231 million subscribers.

Ad product progress

In the knowledge that the cost of living crisis could impact entertainment subscriptions, Netflix’s dramatic volte-face was to introduce a cheaper, ad-funded service in 12 countries in November.

This extra tier could act as a retention safety net for cash-strapped viewers and perhaps serve as a more appealing tier for new subs. However, it takes more than a quarter to set up a booming advertising product… to this end, the streamer is keeping its ad tier subscriber numbers very close to its chest.

Peters said on the earnings call: “The hardest part is actually that first step when you are crawling, because you don’t really know what exactly to expect… we have learned a bunch already.

“We were able to launch this very, very quickly. And the tech is all working. The product experience is good. And that’s really a testament to lots of hard work for both Microsoft and Netflix teams.”

He added that ad plan users are engaging with the service for comparable durations as premium subs, indicating that the interruptions aren’t causing users to log out. “It means we are delivering a solid experience that is better than we modeled and that’s a great sort of fundamental starting point for us to work with.”

He said the growth rate of its ad-funded service is “solid”. “It means that we’ve got a complementary set of offerings that are working to sort of satisfy different needs for different consumers.” Peters also believes that price flexibility is discouraging plan switching.

In the first half of 2023, he claims that “improvements in terms of ad delivery validation and measurement” will come, as well as “targeting improvements”.

Hastings pointed out that Hulu has a 10-year head start on building an ad-funded streaming product, while chief financial officer Spence Neumann said that roughly half of Hulu’s membership is on its ad tier and also that that business is US-only. Netflix may accept a similar split between ad tier and premium, albeit scaled across at least 12 nations.

Neumann said that on this “multi-year path”, the business would be keen to emulate Hulu’s advertising scale. “We wouldn’t be getting into this business if it couldn’t be a meaningful portion of our business. So we’ve almost $32bn of revenue in 2022. And we wouldn’t get into a business like this if we didn’t believe it could be bigger than at least 10% of our revenue.”

Peters tempered some of the ambition, saying: “We are starting from a zero base essentially. And also, we’re also starting from a history as a non-ads platform. We had a lot of folks basically join Netflix fully as non-ad subscribers, so I think that we will be working through that over a period of time.”

Peters believes that ad-funded Netflix will initially be “competing” chiefly for the “traditional TV advertising pool”.

The team ruled out a free ad-supported streaming TV (Fast) channel launch in the near future, with Sarandos joking: “We’ve got a lot on our plate this year”.

Another thing that could positively impact subscriber growth is its recent steps to cut down on password sharing. There could be less backlash to cutting users off now that there’s an inexpensive service in Basic with Ads to adopt.

• What you need to know about Netflix Basic with Ads

• As Netflix subscribers plunge, here’s what its new advertising model could look like

• ‘Seriously, give us a break’ – marketers unimpressed by touted cost of Netflix ads