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FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
Netflix has won the streaming warNow all that remains is to win the advertising competition. That will be easier said than done.
The company remains the undisputed leader in video streaming. Last week, it posted another strong quarter of subscriber and revenue growth. adding more than 8 million net new subscribers From April to June, revenue rose 17 percent to $9.6 billion, while net profit rose by almost a third.
Growth was fueled by last year’s decision to end password sharing and introduce a lower-priced, ad-supported subscription plan. Successful programs like Bridgerton and Baby reindeer It also helped attract viewers.
At a time when rival streaming services are fighting to win customers and make profits, NetflixWith a 27% operating margin and strong free cash flows, it is the envy of the sector. Its shares have traded accordingly. The stock, which is up 35% over the past 12 months, hit a new high this month. At around 30 times forward earnings, it commands a premium over rival streaming operators.
But the subscriber surge triggered by the password restriction can’t last. User growth will slow. This could happen as early as next quarter, with tougher comparisons to last year. Netflix plans to stop reporting quarterly subscriber numbers starting next year.
This is a questionable move that could backfire. Without information on subscriber growth, investors will be forced to focus on other metrics. Netflix will have to start making more money from advertising to keep its share price gains.
The problem is that Netflix is still a minnow in the advertising world. While YouTube and Amazon have well-oiled advertising machines, Netflix is just beginning to build its own ad tech platform. Analysts at Emarketer forecast that Netflix will generate $760 million in ad revenue this year. That would translate to just 2.7 percent of the market share in the so-called connected TV ad business. Hulu and YouTube each have 12 percent, while Amazon has 11 percent.
Of Netflix’s 277 million subscribers, 40 million are currently on the cheapest ad-supported plan. The company needs to do more to monetize these customers. That means showing more ads, or even introducing ads into its other ad-free tiers. On Amazon’s Prime Video, showing ads is the default mode. Customers have to pay more to avoid them.
But people pay for Amazon Prime to get free shipping. Video is just an added benefit. Netflix customers will have less tolerance for ads as they are asked to pay more to not see ads. After years of promoting itself as an ad-free alternative to traditional television, Netflix faces its toughest battle yet.