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Netflix’s Q2 2024 triumph: A deep dive into the streaming giant’s success and challenges
Netflix has once again proven its dominance in the streaming world, reporting a record-breaking gain of 8 million new subscribers in the second quarter of 2024. This brings its global subscriber count to an impressive 277.7 million. The company not only surpassed sales and profit targets but also raised its full-year revenue and margin forecasts. Adding to its accolades, Netflix received a staggering 107 Emmy nominations, leading the field this year.
“This is what winning looks like,” remarked Jeff Wlodarczak, an analyst at Pivotal Research Group, in response to Netflix’s Q2 results. Robert Fishman of MoffettNathanson echoed this sentiment, stating, “We do not see any rough seas ahead for Netflix.”
However, amidst this otherwise sunny outlook, there is one cloud: Netflix’s nascent advertising business is struggling to keep pace with its growing user base.
The rise of ad-supported plans
Netflix’s cheaper, ad-supported plans, available in the U.S. and 11 other markets, have gained popularity. Members on ad tiers climbed 34% in Q2 sequentially, now accounting for over 45% of all signups in Netflix’s ad markets. Despite this growth, total ad sales have not kept up with the rising viewership, which averages nearly two hours per day per member.
“We’re racing behind, essentially, to fulfill all of that increasing inventory and we’re lagging in that regard,” co-CEO Greg Peters admitted during Netflix’s Q2 earnings interview.
In early 2022, after years of resisting advertising, Netflix executives finally conceded the need for an ad-supported model following a rare drop in subscribers. Morgan Stanley projects that Netflix’s ad business will reach $7.1 billion by 2027, representing 13.5% of its total projected revenue. While still relatively small, this is an increasingly important contributor to Netflix’s overall revenue.
“We believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025,” Netflix stated in its Q2 shareholder letter. However, the company added that it doesn’t expect advertising to be a “primary driver” of revenue growth in 2024 or 2025, acknowledging that “building a business from scratch takes time.”
Leadership changes and future plans
Alongside the Q2 earnings, Netflix announced the departure of Madison Avenue veteran Peter Naylor as head of ad sales. This move signals the company’s recognition of the need for new leadership, following the replacement of ad boss Jeremi Gorman with Amy Reinhard, former head of studio operations, last fall.
Netflix is now building an in-house ad tech platform, set to begin testing in Canada in 2024 and launch more broadly in 2025. This move marks a shift from its original partner, Microsoft’s Xandr. Additionally, Netflix is expanding its ad-serving partners this summer to include the Trade Desk, Google DV 360, and Magnite. Peters emphasized the company’s commitment to delivering better ad relevancy, targeting, and measurement.
“Advertisers want us to have all those features in place today,” Peters said. “The biggest negative feedback we get is that we aren’t there right now.”
Peters continued, “We’ve got the hard work ahead of us of building those as quickly as we possibly can and closing that gap as soon as we can… Quite frankly, as we build those features, I am quite certain that there will be more that will come on to the roster that advertisers will be asking for us and more than we’ll go be excited about doing.”
The road ahead
There is no reason to doubt that Netflix will be able to successfully fortify its ad operations. However, as MoffettNathanson’s Fishman pointed out, “the onus is now on Netflix to build out its ad sales, measurement, and tech capabilities necessary to grow this business for the long term.”
As Netflix continues to evolve and adapt to the ever-changing streaming landscape, it remains to be seen how the company will navigate the challenges and opportunities that lie ahead. With its impressive subscriber growth, Emmy nominations, and ambitious plans for its ad-supported model, Netflix is poised to maintain its position as a leader in the streaming industry. However, the journey to fully realizing the potential of its advertising business will require strategic planning, innovation, and a relentless focus on meeting the needs of both viewers and advertisers.
Netflix’s ability to balance its core subscription model with a burgeoning ad-supported business will be a testament to its resilience and adaptability in an increasingly competitive market. As the streaming giant continues to push the boundaries of what’s possible, one thing is certain: the world will be watching.
