Macquarie’s Senior US Media Technology Analyst Tim Nollen joins Yahoo Finance Live to discuss expectations of Netflix’s ad-supported level, reports it could cost $7-$9 USD, ad sales and revenue, and the outlook for the broadcast company.
JULIA HYMAN: Let’s switch gears here and talk about a big tech player, talking about Netflix here. Expectations are high for the company’s much-debated ad service with reports it could even be up and running before the end of the year. And these plans mark a potential big change for the company as it looks to turn its fortunes around quickly. Macquarie raised his rating on the streaming giant to neutral from an underperformer in global ad revenue opportunities.
Tim Nollen, Senior US Media Technology Analyst at Macquarie, is joining us now. Tim, it’s good to see you. So tell me about the analysis of it here, how it’s playing at what this ad-supported level could look like, and what data points you’re looking at to try and figure out how much revenue it could generate for Netflix.
TIM NOLLEN: Of course. Thanks for having me, by the way. Well, there are plenty of inputs here for calculations. I mean, I think our basic premise is that we’ve seen with other streaming services that the ad-supported tiers can actually generate more RPU, more revenue per user, than the ad-free versions. And they can attract more users. So the basic premise here is that Netflix launching a level of advertising is probably a good thing for revenue and profits.
In our note that we published today, we did a lot of calculations behind what happens in this. So anything from what the price of the new ad tier will be, what will be the price you’ll get for ad impressions on the service, will they add subscribers, how many people on the existing service will they switch to an ad-supported tier. And all together, we arrive at a possible advertising opportunity. And I intentionally say a potential ad opportunity, rather than our official forecast, because there’s a lot to do to make this work properly.
But by 2025, we believe that in the US and Canada region, Netflix could generate $3 and 1/2 billion in ad sales. And globally, it could be an $8 billion advertising opportunity, again, in 2025. Now everything is going smooth and smooth. But in addition, you have to take into account the advertising revenue minus the so-called lost revenue or lost subscription revenue of the most expensive tier without advertising.
So if you factor that in, we get to about a billion dollars in incremental revenue, both in the US and internationally in 2025. So, $2 billion in incremental revenue, which should also generate a higher profit margin for Netflix.
JARED BLIKRE: And Tim, I wonder about the timeline here. You spoke of 2025 as the goal. From what I understand, I guess I’m in the media business here, advertisers, companies that buy ads in large blocks, it tends to happen at one time of the year. And how does Netflix’s strategy evolve around the quirks of the industry when it comes to ad buying?
TIM NOLLEN: Yeah, well, I… we picked 2025 as a three-year window where this could be working in most or all markets. But yes, you are right. So a couple of things. First of all, Netflix is… well, the press has indicated that Netflix is aiming to launch this ad-supported service in the US, Canada, and I think three countries in Europe, starting November 1st, right? TRUE?
So as a continuing phase, an acceleration phase, you can’t assume a really big financial impact already this year. But then when you move on to the next year and the year after that, that’s when it really starts to work. What you’re really referring to is the early TV markets in the US and it’s a phenomenon specific to the US which is basically where the traditional network TV groups meet with the media buying agencies every year starting in May. And they’re basically negotiating early sales of their TV ads for next year.
Netflix, probably because that’s the way the industry works, Netflix will probably go in that direction as well and be geared towards selling their inventory that way. They may have already done so at the upfront, which took place starting in May and June of this year. So the next starter season will be important.
But I think what you’re basically referring to is the fact that a large number of ad dollar commitments are made once a year. There was probably some of that already in this television year, which starts in the middle of the calendar year. And looking ahead to next year, it’s going to be a very important sales period for Netflix.
JULIA HYMAN: Now, as we know, overall media ad spend has been trending down with what’s been going on in the US economy. What’s your level of confidence that Netflix will be competitive for those ad dollars? with some of the other media services that already have those long-standing relationships?
TIM NOLLEN: Yeah, yeah, I mean, in some cases, they’ll be competing for ad dollars against traditional TV networks, and obviously against other existing streaming services that already have ad levels. And of course, Disney will also introduce its own ad-supported level in no time. So that’s one thing, competing with existing services, both linear or traditional and streaming.
Now, there is a structural move towards broadcast TV. Connected TV or CTV is the common jargon in the industry. And that’s where Netflix can really compete, I think, and make an important difference. Plus, you obviously have an ad market that’s slowing down. We’ll see what kind of ad recession we might be entering. we don’t know. But clearly, the numbers are slowing down.
So Netflix is entering a competitive market, perhaps a tough cyclical market, and yet a growing structurally connected TV market where Netflix, by virtue of its subscriber base alone, is the single largest player in terms of of the number of people on your platform. So the offer that you can bring to advertisers now, we at Netflix can come in with X million subscribers from day one.
That’s very, very interesting for advertisers who want that big audience and, by the way, they should have some access. their viewing habits are. So here’s a very interesting opportunity, both in terms of the size of the audience and in terms of the opportunity to target them with effective ads.
JULIA HYMAN: And lastly, Tim, quickly, if you look at the revenue that Netflix will get from a customer using the ad-supported tier versus a subscriber, how do they compare?
TIM NOLLEN: So currently, in the US, the RPU, the revenue per user for Netflix, which is ad-free right now, is a little under $16. That was the number in June. You know, I mean, remember, Netflix has three different ad levels.
JULIA HYMAN: Right.
TIM NOLLEN: Sorry, there are three different subscription tiers in the US right now. What we assume is that they take $5 off the price of each level. So that equates to an average income in 2025 of $10. So it’s not like they’re going to offer a $10 level. It’s that in our calculation, we do it for simplicity, the subscription price of $10 goes to $5, the price of $15 goes to $10, the price of $20 goes to $15.
Now, there are all kinds of variables, all kinds of analyzes that we’ve done in our work that you can flex however you want. But we don’t know what the real price will be. We’ve heard numbers from $7 to $9, which apparently Netflix has come out and refuted. In our analysis, we assume that this is essentially a 35% cut in total subscription revenue that Netflix will earn from three new ad tiers on each of its existing services.
JARED BLIKRE: Tim, it’s good to put some numbers on that. I’m sure there are booster backs among your cohorts that are filling up with numbers right now. Tim Nollen, Senior US Media Analyst at Macquarie, thank you.