Netflix survives its final ads-free quarter with a return to subscriber growth

The news: Netflix released its Q3 results on Tuesday after the bell and shared considerable information about its forthcoming ad-supported format.

• Analysts expected the platform would add 1 million subscribers; instead, the company netted an increase of 2.41 million—more than doubling its guidance from one quarter before.
• Asia-Pacific accounted for 1.43 million new customers; US and Canada, however, combined for just 100,000 new accounts.
• Wall Street consensus forecasts compiled by Bloomberg called for revenue of $7.85 billion and $2.22 EPS; instead, the company netted $7.93 billion and $3.10 EPS.

Looking ahead: As attention shifts toward the platform's planned ad-supported tier, advertisers are naturally placing less weight on the company's subscriber figures than in past quarters; instead, they’re paying attention to how the new tier will affect the advertising world.

• It will cost $6.99 a month for Basic with Ads and become available to US customers on November 3; soon thereafter, the plan will be launched in markets like the UK, Canada, Mexico, South Korea, and Japan.
• It’s true that some full-price subscribers may switch to the ad-based tier, particularly given today’s inflationary environment, though executives have publicly dismissed that speculation as overblown.

The Disney comparison: It’s hard to overlook Netflix launching its lower-priced plan with ads at the same time Disney+ is adopting ads. Both ad plans have something in common: Each streamer is pledging to run just four to five minutes of ads every hour while refraining from placing spots in kid-friendly programming.

• Netflix still has some issues to fix: Its ad-supported tier won't initially include all of the service’s programming, which may be its most obvious flaw. Licensing issues are to blame, and Netflix has highlighted this as a problem it plans to solve—but that doesn’t make it any less of an Achilles heel at launch.
• Basic with Ads has other limitations: a 720 HD stream limit and one device restriction on playback. Users interested in 1080 HD and support for multiple devices must pay for the $15.49 per month ad-free Standard tier; 4K is only accessible to customers who pay $19.99 per month. The $7.99 Disney+ ad-supported tier comes bundled with multiple device streams, supports 4K, and includes all the platform’s content.

Why it matters: The stakes are immense for Netflix—and the advertising world in general.

• The company recently struck a measurement deal with DoubleVerify and Integral Ad Science (IAS) and joined BARB, the leading UK audience measurement currency.

The big takeaway: Advertising brings in customers that previously wouldn't have considered Netflix at full price; the ad-supported tier allows those consumers to give the platform a second look.

• It’s hazy how big advertising will be for Netflix in Q4: Worldwide advertising president Jeremi Gorman has stated in the past that Netflix has sold out of nearly all of its ad inventory ahead of the launch which, if true, defies the general trend of a decline in global ad spend.
• At the same time, the streamer cautioned not to expect a “material contribution” from Basic with Ads in Q4, given its launch midway through the period. It’s a fair point, but given the high CPMs Netflix has been asking for, it’s safe to say the company is trying to manage expectations coming out of the gate.

This article originally appeared in Insider Intelligence's Marketing & Advertising Briefing—a daily recap of top stories reshaping the advertising industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

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