Ad-Supported Offering Could Boost Netflix's Overall U.S. Revenue 21%

Netflix’s launch of an ad-supported video-on-demand (AVOD) tier could generate $2.5 billion in annual ad revenue and boost overall U.S. revenue by 21%.

Those are estimates from The Information, based on its analysis of results to date for rival streaming services with AVOD tiers.

Netflix’s total revenue rose 19% year-over-year, to $29.7 billion, last year. In Q1 2022, it rose 9.8% YoY, to $7.87 billion — but that represented a considerable slowdown from Q1 2021’s 24.2% YoY revenue growth.

At this point, trying to estimate potential revenue gains from advertising, particularly in the context of its effects on subscriber revenue, is quite speculative.

Much depends on the assumption regarding the ad-load decision and the chosen pricepoint for the AVOD service.

Obviously, the objective is to maximize paid subscribers while introducing the incremental ad revenue--not a simple task, given the multiple dynamics involved.

It means attracting new paid subscribers, particularly by converting free Netflix password-sharers to low-cost AVOD users; maintaining as many existing subscribers as possible on their current pricing plans; and simultaneously reducing churn by converting current premium subscribers who might be apt to cancel due to the cost to the cheaper AVOD option.

Assuming Netflix decides to make its AVOD as attractive as possible by emulating HBO Max, which at 4 minutes per hour has the lowest ad load, and that Netflix charges $9.99 for its AVOD, The Information projects that Netflix could grow U.S. subscribers from an estimated 66 million to 76 million.

The assumption is that 30 million would choose the lower-priced AVOD service (the same number estimated to currently be sharing passwords in the U.S.), and 46 million would continue their paid ad-free services. (Most are on the $15.49 standard plan; across both the U.S. and Canada, Netflix is estimated to average $14.91 per user.)

Also assuming that Netflix is able to realize about the same ad revenue per AVOD subscriber as HBO Max — about $7 — that would add up to about $2.5 billion in incremental annual domestic advertising, driving total U.S. revenue up 21%, to about $14.4 billion.

1 comment about "Ad-Supported Offering Could Boost Netflix's Overall U.S. Revenue 21%".
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  1. Ed Papazian from Media Dynamics Inc, May 24, 2022 at 11:29 a.m.

    Assumptions, assumptions. Even if Netflix gets to the 30 million sub level with its AVOD service and garners $2.5 billion annually in net---less agency commission ?---ad revenues per year, aren't there any costs associated with this service? For example, marketing and ad sales costs to say nothing of whatever must be paid to program producers--residuals, maybe.  And shouldn't one figure in some reasonable overhead charges and how about charging the AVOD service for the technical process of pumping out its content, maintaining the flow, servicing subscribers, keeping track of their payments, etc. Is all of this free? So one might ask how much of that $2.5 billion will actually contribute to the corporation's bottom line after the added expenses are deducted.?

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