December 9, 2023

“We’ll be back right after these messages.” Centuries-old commercial lead-in takes on new meaning at a time when there’s a bounceback for Netflix

The share rests on the upcoming launch of ad-supported tiers for the two streaming leaders.

For Netflix (ticker: NFLX), the goal is to offset the loss of subscribers with cheaper plans. For Disney+, the recent acceleration in cable cord-cutting is to be offset. baron’s Those concerns were laid out in a March cover story.

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A lot could go wrong for these companies and their competitors in the near future. A glut of advertising slots can drive down industry prices, especially if the economy weakens. Too many ads per hour can frustrate viewers. Very few people can speed up defection with the full-price streaming tier and cable.

Still, if the television industry is successful, it could not only rekindle growth, but also draw back the power that has been lost to the closed-off advertising economies of Google and Facebook.,

“The connected television is what will take down the walls of walled gardens,” says Jeff Green, founder and CEO of The Trade Desk.

(TTD), which competes with Alphabet as an ad-buying platform and has partnered with Disney in streaming advertising. They mean that streaming can match the targeting power of online search and social media while creating an emotional connection to video. “A banner ad will never make you cry,” he says.

The Trade Desk is poised to be a winner as more ad dollars flow to streaming.


(MSFT), a booming advertising company, should also benefit. stop

(ROKU) may have better prospects than a decline in share prices. Walt Disney (DIS) and Warner Bros. Discovery

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(WBD) would benefit from rich content engines. Meanwhile, Netflix faces considerable risk. And across the industry, more consolidation appears to be inevitable.

Advertisements already abound on streaming. What is changing now is the scale. Netflix dominates viewership. Its users took in 1.3 trillion minutes of content during the most recent TV season, roughly from late last September to early May, according to Nielsen data from BofA Securities. CBS, the ratings leader in traditional TV, and the next biggest streamer, has received five times more attention than Disney+.

Netflix has extended the launch of its ad-supported service to November to beat Disney+ on December 8. That means it will want to lock down advertisers until the end of this month. It is expected to debut at an “ad load” of four minutes per content hour.

Jessica Reif Ehrlich, a media analyst at BofA, predicts what she calls a muted price increase in the form of an accelerated increase in ads for each hour. “There’s no way it’s going to be on three, four, five minutes,” she says. “Hopefully this will not be what we see on the linear, which is unbearable.”

The TV business is full of jargon. Here’s a quick glossary for investors. Linear means that movies and shows play on a set schedule, and can refer to old-fashioned broadcast and cable, or FAST, which stands for free ad-supported streaming television. Fast services skimp on content costs and pack in ads, but users can’t beat the price. Paramount Global

(PARA) owns the FAST service Pluto TV; Comcast

(CMCSA) has Zumo; and fox

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(Fox) has Tubi.

The better known streaming services, where users pay a subscription to start shows whenever they want, are called SVODs for subscription video on demand. When costs are subsidized with commercials such as the new Netflix and Disney+ tiers, they are referred to as AVOD. Some FASTs operate in AVOD, and vice versa, and both services compete for similar advertising budgets.

That is the classification. Here’s how to monetize: Ad revenue is determined by ad load, audience size, and CPM, or cost per mill, which is Latin for thousand, and refers to the cost of reaching multiple screens. Is. Advertisements are sold ahead of time during the so-called advance negotiations in late spring and early summer, and at the last minute known as the scatter market. TV companies use a carrot-and-stick approach to get early commitments, offer a location of choice when upfront, and warn of higher rates for those who wait to scarce.

To sum up the current state of TV advertising, this year the front lines were strong, but the dispersion is choppy. Furthermore, to date, streaming has made most of its advertising in scarcity, while traditional television still rules the upfronts. This is to be changed.

Now for the question that matters most: Where will the CPMs come in for Netflix? If they are high, it can provide cover for the entire industry to prosper. If they’re low, Netflix will need heavy ad loads in a hurry, and it still may not be ready for customers who trade below full-price subscriptions. Whisper numbers are what the company is looking for at $65. Some people on Wall Street are whispering back: “Good luck.”

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Hulu is a veteran in selling streaming ads, and enjoys CPMs that are estimated at $20 and as low as $30. (Disney owns two-thirds of Hulu and will likely buy the rest from Comcast in 2024.) HBO Max is a top CPM draw, pegged at $40. Netflix analyst Nate Schindler of BofA, who is bearish on the stock, expects a CPM of $20 to $40. In a recent analysis, he calculated that Netflix may need $3.8 billion in annual advertising revenue to make up for lost subscription fees, and will likely generate less than $1.8 billion to begin with.

Tim Nolan at Macquarie Research predicts that Netflix will secure a CPM of $50 by next year and $60 by 2025. By then, he sees the company bringing in $3.6 billion in US and Canada ad revenue, and $8.5 billion worldwide, or more than $2 billion. The company will bring without advertising. He recently upgraded the stock to neutral.

Evercore ISI analyst Mark Mahaney upgraded Netflix last week to outperform. He sees $1 billion to $2 billion in incremental revenue and 10 million more customers by 2024. A recent survey of “churning” or departing customers led them to believe that 20% of them could return with a cheaper level. How cheap it will be is not yet known, but forecasts of $7 to $9 per month are common. The cheapest ad-free Netflix plan costs $9.99 per month, and the most popular is $15.49. Disney recently priced its ad-supported Disney+ at $7.99 a month — the same price as the current ad-free service, which will soon drop to $10.99.

Illustration by the Baron’s Staff; alami (5); Netflix (2); Disney+ (2)

One factor that could weigh on Netflix’s CPM early on is that the company will give very little audience information, which may have more to do with its capabilities than privacy concerns. A partnership with Microsoft will eventually help.

“The ink isn’t even dry on the deal,” says Ratko Vidakovic, founder of AdProfs, an ad-technology consultant.

Traditional television has limited ability to target audiences with precision. The Internet has great potential, but it has long relied on technologies such as tracking cookies that raise privacy concerns. Apple

and alphabet

Third-party cookies have been cracked down on their devices and software, and now advertisers are considering a post-cookie world.

Meanwhile, streaming services have a direct credit card relationship with customers, giving them valuable insights that can get top dollar from advertisers. What is needed is a way for advertisers to tailor their campaigns without Netflix sharing personal customer details or allowing outsiders to track Netflix users on other sites and serve them ads at a lower cost.

One answer is called a data clean room or software that allows collaboration without oversharing. The Trade Desk is providing the data clean room for Disney. Microsoft, which just bought AT&T . Bought a programmatic advertising company called Xandr from,
It is believed that something similar is being done for Netflix as well. Microsoft declined to comment.

This could eventually make Netflix an advertising powerhouse. But between now and then there is considerable risk for investors. Free cash flow has not been meaningful and consistently positive for the company. Content costs soar—witnesses more than $1 billion more than

is expected to spend on its new series related to Lord of the Rings Books. Studios that once licensed shows cheaply are now crediting them for their streaming platforms.

Netflix has lost subscribers in two quarters. The stock has rebounded 28% since late June in anticipation of a return to growth, versus 4% for the S&P 500.

index. Meanwhile, the US advertising industry turned in its weakest performance in two years in July, with spending…