While Netflix’s ad-supported tier has surpassed 10 million monthly active users globally, the streamer’s co-CEO Ted Sarandos acknowledged Thursday that the offering is still in its infancy and “definitely not at the scale that we want it to be at yet.”
“We’re a year into it. Jeremi [Gorman], by the way, did a great job getting us to where we’re at today,” the executive told Bloomberg’s Screentime conference on Thursday. “What we have to do, by the way — not just us, all these platforms that have added an ad option — they’ve all got to do the same thing, which is you have to get that tier at scale and grow that at scale with fans and viewers.”
Last week, Netflix announced that Amy Reinhard would take over as president of the ad business, with Gorman set to exit. Following the announcement, the Information reported that the shakeup was part of an effort to speed growth in the ads business.
“We’re super excited about Amy Reinard coming in. She’s a veteran at Netflix who understands all the complexities of growing new businesses at Netflix,” Sarandos added. “So you should look at it as a doubling down, not a failing and moving on and it’s new. So we’re definitely in our infancy and it’s definitely not at the scale that we want it to be at yet and consumers have to choose between it.”
Sarandos also addressed the longtime view by executive chairman and former co-CEO Reed Hastings that Netflix wouldn’t move into the ads business — a view that has since changed.
“When we first started the business, we were classically counter positioned against advertising. So for us to say we would never do it was part of that thing to say,” Sarandos explained. “If you go back to our old DVD business, our counter position was no late fees. Audiences hated, fans hated paying late fees. So that was our big thing, movie watching with no late fees. And when we started getting into streaming, we said streaming will be the new television and what do people not like about TV? Waiting and ads. So our classic counter position was watch it all at once and no ads.”
But as Netflix got bigger, Sarandos said leadership realized there wasn’t an option for consumers who don’t care about having advertising and wanted a lower price point.
“So we were touting that we were all about choice and then not giving a choice to those folks who wanted a lower price and didn’t mind advertising,” he said. “Now we have to be another thing. We have to be able to deliver for advertisers and we have to deliver for the audience a product that’s innovative and doesn’t interrupt the viewing experience in a way that makes the viewing experience worse. All those things we have to work on and get better and better at and we’re a year into it… You have to drive value first and then you can drive revenue.”
Netflix chief financial officer Spencer Neumann previously said that the company’s advertising business could one day account for 10% of its revenue. During its second quarter results in July, Netflix noted that its current ad revenue was not material to the company due to a smaller membership base. It added that it expected overall revenue growth to accelerate in the second half of the year as it continued to expand its password sharing crackdown and subscriptions to its ad-supported tier grew.
In addition to the ad tier, Sarandos weighed in on how an eventual deal with SAG-AFTRA could impact the broader entertainment industry.
Talks between the guild and the Alliance of Motion Picture and Television Producers broke down Wednesday, which Sarandos said was due to an added levy based on subscribers proposed by SAG-AFTRA, which he noted was a “bridge too far” compared to the studios’ original offer of a “success-based bonus.”
“You’ve got to remember, prices escalate, the cost of content escalates on a per performer or per title basis all the time. So this is a work into the economics of that and some of that is forecast to happen every time you have a new contract. So I don’t know what will happen because I think it’ll happen company by company,” he said. “We are not changing our spend forecast or any of those things, so we think it will change incrementally the cost of content over time, for sure.”
Bloomberg recently reported that Netflix is planning to increase prices for subscribers once the SAG-AFTRA strike is resolved.
“It wouldn’t be just because of that, because obviously in non-contract years we’ve had price increases, too,” he said when asked directly about a possible price increase. “Like I said, it’s a part of the economics of the town and I think it’s really important to pay people for their work and I think the performance bonus really adds an enhancement to that because sometimes that success does drive the business.”