Why Wall Street Analysts “Are Not Convinced”

  • Netflix plans to launch an ad-supported version for consumers for $ 7- $ 9 per month.
  • The move could bring the company $ 8.5 billion in revenue by 2025, according to a Wall Street analyst.
  • But it remains to be seen how many new subscribers an advertising level would attract.

Viewers may soon embrace a version of Netflix that puts ads in episodes of “Stranger Things” in exchange for a lower subscription price, but is Wall Street buying what the streaming service is selling?

Netflix’s plans for an ad-supported tier are underway. The company partnered with Microsoft to help sell its inventory in the short term and recently hired two top executives from Snap to build the sales business in the future. Netflix ads are reportedly expected to launch in November in some countries, according to the Wall Street newspaper – although the official launch date is early 2023.

In the wake of some tough quarters of near-saturation in key US and Canadian markets, over a million subscriber losses, hundreds of layoffs, and a massive drop in stock prices, Netflix isn’t quite Wall Street, honey. it once was. And some are skeptical of an ad tier’s ability to attract new subscribers, however, the cheaper Netflix option, at $ 7- $ 9 per month, could convince viewers to pay $ 15 per month to downgrade.

“We are not convinced that an ad-supported service that costs a few dollars less is what these families have been waiting for,” Jefferies analyst Andrew Uerkitz wrote in a September 7 research note, referring to the North American audience. “Truly incremental secondary growth is much more likely in less penetrated regions.”

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But some equity analysts are optimistic about the new service given the economic climate.

“A looming recession in late 2022 or 2023, as well as persistent inflation in staples like food and energy, will likely induce consumers to try to cut costs,” Macquarie analyst Tim Nollen wrote in a paper. notes to customers, again on 7 September, by updating his opinion on the stock to neutral to underperform. “We believe these economic factors, coupled with increased competition in the streaming space, will enable the right market conditions for Netflix’s cheapest ad-supported service.”

Nollen highlighted research indicating the growth of the ad-supported video on demand (AVOD) market in the United States and stagnation in the subscription streaming space.

Netflix’s recent price hike to $ 15.49 per month from $ 13.99 in early 2022 meant that “customer satisfaction with value saw its biggest drop in a quarter and planned cancellation at due to the increase in prices has seen its largest increase, “according to Kantar. But an AVOD tier could both prevent cash-conscious Netflix subscribers from permanently unsubscribing, and bring back those who abandoned their accounts, the company also noted in its analysis.

According to Nollen’s estimates, Netflix’s advertising level could generate revenue of up to $ 8.5 billion in 2025.

Morgan Stanley analysts wrote that Netflix investors “will have to be patient” with the launch of the new advertising service, calling the company “a bit of a victim of its own success,” given the company’s estimate that Netflix is. already present in 60% of households with broadband access in the United States

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“Depending on how Netflix rates and markets the ad tier, it may take longer than expected to create an ad-supported sub large enough to deliver significant ad revenue,” the bank’s analysts wrote on Sept. 9, offering a rating of equal weight on the stock. “Furthermore, the opportunity for Netflix to drive incremental revenue growth from an advertising level outside the US is far from clear.”

As for sentiment on Madison Avenue, where executives are literally buying what Netflix is ​​selling, some advertisers said they were disappointed with the company’s initial launch for its ad-supported level, complaining that the offer looks like rushed and too expensive. Netflix is ​​looking for an expensive CPM (the cost to reach 1,000 people) of $ 60 but without the features most other streamers offer, such as the ability to use third-party services to prove that the ads have reached their target audience. .

Netflix has bragged that its service will solve many of the problems prevalent in connected TV – for example, the company told some media buyers that it will recruit a wide enough variety of advertisers to prevent viewers from seeing a lot of repeat ads.

“The frequency cap is something I wish streaming services were better at,” said one ad buyer, who spoke on condition of anonymity so as not to jeopardize their relationship with Netflix.

“They think everything they do on Netflix is ​​unique,” this person added. “It isn’t. There is literally nothing unique about Netflix.”

However, the buyer said what’s promising about Netflix’s plan is that, as a mature platform, it should provide advertisers who have been wary of investing their ad dollars in the new streaming platform – and thus resist CTV. in general – a reason to move budgets there.

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“This legitimizes the whole industry,” this person said.

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