How Netflix’s ad tier is taking shape and more earnings call takeaways

A 'crawl, walk, run' approach to ads

Netflix Co-CEO Ted Sarandos during Cannes said that Netflix’s initial ad offering will not look like what the company has dreamed up for advertisers. The streamer doubled down on that sentiment during its earnings call, with Chief Operating and Chief Product Officer Greg Peters stating its ad timeline was on a “crawl, walk, run model,” starting in a way viewers are familiar with but later transforming into something “fundamentally different from the ad experience on linear in a way that supports all stakeholders.”

“We think there’s a tremendous opportunity to leverage that innovation DNA that we have as well as a bunch of enabling characteristics around addressability and measurability,” Peters said.

Peters later added that the timeline for its advertising will depend on the pace at which Netflix subscribers will convert to the tier. Netflix will begin by launching its ad-tier “first in the countries that have the more mature ad markets,” with Spencer Neumann, Netflix’s chief financial officer, explaining the rollout approach will work complementary to supply-demand as “it’s not like all of a sudden all folks on ad-free Netflix are going to join advertising Netflix.”

Ad-tier Netflix could have less content

As streaming competition from legacy networks has ramped up, Netflix has taken a blow from losing fan-favorite and high-performing series such as “Friends” and “The Office.” Now, the streamer has made conscious efforts to build out its original content, reporting in its shareholder letter that 60% of content on Netflix is produced in-house. But what about the other 40%?

Netflix is “in conversation with the studios” to secure licensing rights for non-owned content, Sarandos said on the call, but inevitably not all of it would be cleared to run on the ad-supported tier. But the co-CEO doesn’t see that limitation as “a material holdback to the business” as most of Netflix’s content that drives viewership—“Stranger Things,” “Squid Game” and, for the second quarter specifically, “The Lincoln Lawyer” and “The Ultimatum”—is owned by the company and will appear in the ad-tier at launch.

Pricing remains under wraps

When pressed for information on subscription prices for the upcoming ad tier, Peters was tight-lipped, remaining vague around the mention of it being priced below the current base subscription. Rather, he emphasized the hope for Netflix to make the decision simple for subscribers despite “making that more complicated because we’re going to have more discrimination features that would inform what offering consumers ultimately choose to get.”

But Peters reiterated that Netflix’s ad game is a long-term investment, starting small “relative to our total revenue mix” and growing into a larger revenue driver over time. In contrast, the streamer has shorter-term plans to bump its slowing dollar growth, such as its impending password-sharing crackdown which is currently being tested in Latin America.

Netflix is already in talks with advertising partners

Despite the ad tier being in its nascent stages, Peters said Netflix has already seen “excitement in our early discussions with brands, holding companies and the agencies.”

Last week, Netflix announced Microsoft as its tech partner to build out its ad infrastructure and Peters announced that its relationship with Microsoft will be exclusive, ignoring questions about the potential to start an internal ad team at Netflix. The announcement came as a surprise to many as Microsoft’s experience in streaming TV is limited. But Peters expressed excitement to have a hand in Microsoft’s growth in streaming, perhaps suggesting Netflix will take on greater responsibility in the efforts as opposed to if it hired a more experienced ad partner. 

“They very much are approaching this as an opportunity to work together, to collaborate and to evolve both the technical capacity and also what the experience is and what the go-to-market approach is,” Peters said. He later added that Microsoft met Netflix’s fundamental needs—scale, tech, privacy—but also was committed to a long-term partnership to “basically try and create a new ads ecosystem around premium TV, connected TV ads.”

Peters declined to divulge minimum revenue guarantees from the Microsoft partnership, a figure that is rumored to be multi-billion.

Despite gloomy predictions, Netflix is still confident in its future

Panic about the future of streaming began when Netflix, which leads all streamers in subscriber numbers by a large margin, reported a first-quarter loss of 200,000 subscribers in April and projected it would lose 2 million in the second quarter. Those industry worries were inflamed by greater pressure from the war in Ukraine, rising inflation, stock market drops and an impending recession. But Tuesday's report may calm fears of an impending streamer apocalypse.

The streamer, whose subscriber base sits at over 220 million, lost just under 1 million subscribers in the second quarter, half of what it had predicted. During the earnings call, Netflix’s executives attributed that to a natural turnover after it boosted subscription costs in March. Reed Hastings, Netflix co-CEO, said the report showed “less bad results” than projected. 

Although the pace of growth continues to slow, Netflix’s revenue was still up 8.6% year over year, totaling $7.97 billion. Hastings said that if there’s one driver that achieved the company’s “less bad results” than projected, it would be “Stranger Things.” Netflix reported that, according to a Nielsen report set to release Thursday, the streamer snagged 7.7% of all TV viewership in June. A previous report said that “Stranger Things” broke records for the measurement company, accruing 7.2 billion minutes of streaming from May 30 to June 5.

“Looking forward, streaming is working everywhere,” Hastings said. “Everyone is pouring in—definitely the end of linear TV over the next five, 10 years.”