Are Ads Now Vogue; Big Streaming Corps are Increasing Ad Supported Offerings
This past April, Netflix made the surprise announcement that it was open to offering an ad-supported version of its popular streaming service. They later brought this announcement to fruition and announced that they would be doing this via a partnership with Microsoft. This represents a major shift in business strategy for Netflix, as their previous business model was based entirely on paid subscriptions, even going so far as to limit product placement in their original content. Historically, this business strategy has served them very well, as their stock had a return of over 3,500% over the 2010s, making it the best performing stock of the decade. Are Ads Now Vogue; Big Streaming Corps are Increasing Ad Supported Offerings
Anytime a company with a history of such high performance changes its business model, it is worth noting. This is especially true because of Netflix’s size — despite an increase in competition the past few years, it remains the world’s largest streaming service. It currently claims over 200 million subscribers. According to a recent report by Nielsen, it’s also the most-viewed streaming service, with about 22% of all streaming time, more than HBO Max and Disney+ combined and even beating free services such as YouTube.
Netflix’s decision does not seem to be an isolated incident. Disney recently announced plans to introduce an ad-supported plan for Disney+, which would be $7.99 a month, and raise prices of the ad-free subscription to $10.99. Disney stated on its website that “Expanding access to Disney+ to a broader audience at a lower price point is a win for everyone—consumers, advertisers, and our storytellers.” Disney’s turn to an ad-supported Disney+ is an attempt to reach their goal of over 230 million subscribers globally by 2024, which is looking a lot more difficult as domestic growth is close to turning negative. Disney currently owns a majority stake in Hulu, so it has exposure to ad-supported streaming.
More recently, on August 4, Warner Bros. Discovery CEO David Zaslav, announced that his company, which owns HBO, was looking into a free ad-supported streaming service. This announcement came on the heels of a $3.4 billion loss for the second quarter of 2022. Entirely free ad-supported content is already available to consumers. Peacock, Tubi, and Freevee, owned by Comcast, Fox and Amazon, respectively, are just a few of the streaming services that are free or have a free subscription plan; however, unlike Warner Bros. Discovery, none of those companies are major players in the streaming world. While Amazon does have many subscribers, its focus is not on streaming in the same way that Disney, Netflix, and Warners Bros. Discover are.
At this point one might ask just what type of impact ads can have these companies’ bottom line. When people think of ad-supported streaming services, they may think to the likes of YouTube or Freevee, both of which have little in the way of original content and, generally speaking, offer lower quality content. However, that should not be confused with low profit potential. In 2021, Netflix reported just under $29.7 billion in revenue. However, Google reported YouTube’s ad revenue for 2021 to be $28.8 billion. This demonstrates the incredible power of ads. YouTube’s revenue from ads was nearly as much as Netflix’s, and their ad revenue growth was a lot more significant than Netflix’s. From 2020 to 2021, YouTubes revenue growth was around 45.8% while Netflix’s revenue growth for that period was just 18.8%. If growth continues at a similar rate, YouTube will be making more off ad revenue than Netflix makes in total revenue by the end of this year.
This growth may help explain why so many companies are turning to ads: if they are becoming more profitable, then the opportunity cost may be too much to pass up on. Google, in its 10-K, stated that an improvement in ads format and delivery was one of the factors that caused the increase in ad revenue. With these improvements, advertisers are willing to pay more for them, and as such, increase the margins of the companies providing the advertising services.
No matter how good an ad is, it needs a lot more to succeed. A corporation like LVMH, the conglomerate which owns luxury brands such as Louis Vuitton and Dior, is more likely to find success advertising in fashion magazines such as Vogue or Vanity Fair than it would in Popular Mechanics. While this is an extreme example, the concept is easy to see: a major part of ads is getting them to the right people. A way to make sure that digital ads reach the right consumers has the potential to be very helpful to advertisers and to be very profitable. One company which specializes in this area, The Trade Desk, is, as of mid August 2022, trading at a P/E ratio of over 1,000. The P/E ratio of a company is the price to earnings ratio and represents what multiple of a company’s earnings the combined value of all its stock is trading at. If a company has a high P/E ratio, it means that the value of the stock is many times what the company is currently earning and as such is usually a sign that investors expect it to earn significantly more in the future. If it was not expected to earn significantly more in the future, investors would be unwilling to pay such a premium. This means that higher P/E ratios are generally associated with companies with high earnings potential. To put into focus how significant a P/E ratio of over 1,000 is, it should be noted that the average P/E ratio of a company on the S&P, as of mid August 2022, is around 22, and the P/E ratios of growth companies such as Nvidia and Tesla are 50 and 107, respectively. This shows that investors expect The Trade Desk to have a substantial increase in earnings in the future.
What does The Trade Desk do? It operates a marketplace for connecting companies wishing to advertise with the best possible advertisers for them. A big part of how they do this is with data they collect from various sources. They then use this data to help companies focus more spending on ads that are best for them and less on ads that are less beneficial. Companies like Netflix, Disney and Warner Bros. Discovery will be able to utilize strategies like this particularly well. As they have access to what clients watch, they can build a profile on these clients regarding what ads they would most want to see, and also run ads in the most ideal place in a film. Think about seeing a car in a highway chase in an action film and then seeing an ad for that car. This is very similar to traditional product placement in films, which can be very significant, often valued in the 10’s of millions of dollars for large films.
It is likely that technology for focused ads will help companies providing digital ads to become significantly more profitable. Many investors believe that this form of advertising has substantial growth potential. This may be one of the reasons why so many companies that in the past have rejected advertising are now turning to it. While there are other influential reasons that probably influenced their decisions as well, recessionary spending habits of consumers in the face of rampant inflation and the slowdown in subscriber growth these past few quarters are most apparent. More efficient ads capable of making a higher profit than in the past may be too much a temptation to avoid.
Photo Caption: Netflix Logo
Photo Credit: Pixabay