Netflix (NASDAQ:NFLX) has been reported this week to be talking to a few companies about its plans to create a service tier supported by advertising, and co-CEO Ted Sarandos confirmed that chatter in a prominent appearance in France.
The streaming pioneer had been linked unofficially to talks with ad behemoth Google (NASDAQ:GOOG) (GOOGL) as well as Magnite (NASDAQ:MGNI) on the supply side, and even Comcast’s (CMCSA) FreeWheel to provide an ad server, among others.
“We’re talking to all of them right now,” Sarandos said on a panel at Cannes Lions, the ad world’s biggest gathering. “All have different solutions.”
That reinforces the idea that Netflix won’t look to jump in right away with a custom-built solution but will rely on key partners for some time. And as co-CEO Reed Hastings suggested as the subject was introduced in April’s earnings call, the company plans to ease its way into the advertising approach by figuring out what works.
“We want a pretty easy entry to the market – which, again, we will build on and iterate in,” Sarandos said Thursday. “What we do at first will not be representative of what the product will be ultimately. I want our product to be better than TV.”
As for building its own approach, “If it becomes so important that we want to have control over it, then we might,” Sarandos said.
The partner chatter has also included various mentions of Roku (NASDAQ:ROKU), which offers direct publisher access while serving as something of a rival to Netflix; as for the rumor mill suggesting Netflix (NFLX) might buy Roku, “I don’t know where that came from,” Sarandos said. “We don’t need it.” ROKU stock is up 2.2% Thursday.
A refreshed look at streaming churn from BofA suggests that subscriber turnover will remain heavy, particularly among lower-income customers, and it followed from the research that customers “across all income levels” would switch to a discounted ad-based alternative.
Meanwhile, Benchmark is “skeptical” on assigning immediate value to Netflix’s plans. Partners like FreeWheel (CMCSA) or Google (GOOG) (GOOGL) would be likely to insist on exclusivity, analyst Matthew Harrigan noted.
“Although the market is currently assessing incremental member growth and pricing effects for advertising as well as a crackdown on account sharing, a fair default approach to looking at upside is realizing that Netflix is near its fair share of U.S. total video spending and indexing at nearly 150% on the SVOD category,” Harrigan said.
The firm estimated that just over $12B in Netflix’s near-$13B in 2021 U.S./Canada revenues were from the U.S. – implying it captured 5.7% of overall TV spend, and 47.4% of subscription video on demand spending. And Netflix’s share of U.S. TV spend should “reasonably be below its viewing share given the very high advertising CPM (rates) and subscription fee premiums attached to sports.”
Benchmark remains a Sell on Netflix and its price target of $157 currently implies 12% downside.
Amid all the Netflix ad talk, most advertising technology names are managing a rally Thursday: Magnite (MGNI) +3.1%; The Trade Desk (TTD) +3.8%; AppLovin (APP) +4.9%; PubMatic (PUBM) -1.2%; Digital Turbine (APPS) +4.8%; and ironSource (IS) +5%.
In Nielsen’s last monthly macro look at TV usage share, Netflix boosted its percentage of overall television usage to 6.8% from the previous month’s 6.6%.
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