How big is Netflix’s advertising opportunity now that the ad-supported service tier has reached its first milestone of about 5 million users?
Wells Fargo analyst Steven Cahall assessed this question in a deep dive published Wednesday, titled “The Long & Winding Road Ahead for Advertising.” He started his report with some basic math. “It seems logical that the $70 billion+ (US) TV ad marketplace will be an easy choice for Netflix’s ad-supported tier,” he wrote. “In fact, we think there’s only $8.7 billion up for grabs right now, as that’s advertising value that’s non-sports linear and also not locked in by media companies in their upfront deals. It will take time to gain market share as Comcast/Disney/Fox/Paramount/Warner Bros. Discovery will each deliver more than 600 billion TV impressions per year, versus Netflix’s estimated 15 billion from 5 million U.S. ad-supported subscribers.”
Cahall’s conclusion about the ad status quo: “Brands are addicted to linear.” The Wells Fargo analyst provided further data to support his argument. “Our analysis of more than 100 linear networks points to approximately 160 billion hours of ad-supported time from major media companies generating 2.9 billion impressions at an effective CPM (or cost per thousand) of just $12,” he stressed. “We think advertisers are addicted to volume and price, even though they pay much higher for sports and primetime for a mix of quality and quantity. We think major AVOD (including Netflix) currently accounts for 36 percent of ad-driven supported TV hours, but only 13 percent of impressions (lower ad load) at an effective CPM of about $16.”
As Netflix management has currently signaled an average revenue per user (ARPU) of about $8.50 per month for its domestic ad level, Cahall noted that “we believe the highest effective AVOD CPM is currently $21 (for ) hulu is.” His prediction: “At scale, Netflix will see similar CPMs, equating to $10 per month ad ARPU.”
What’s next for Netflix’s advertising business? The Wells Fargo analyst mentioned several options and milestones ahead. “We see more than 20 million US ad subscribers as an important goal, as that would bring Netflix’s annual impressions closer to those of Hulu and AMC Networks (although still less than one-sixth of the larger media companies),” he said. . “Paid sharing is an important catalyst and we believe premium levels of advertising will come.”
The pundit also envisions the company considering forays into ad-supported live content, such as through more stand-up comedy, reality TV, and even a potential deal for WWE’s. Smackdown.
Cahall’s conclusion: “The US TV advertising market is unique, mysterious and still quite analogous. This deep dive is designed to help investors understand Netflix’s opportunity, but we are cautious about the time/obstacles.” However, he did call out “improving customer lifetime value”, highlighting that Netflix was “upper value per sub” overall.
As a result, Cahall stuck to his overweight rating on Netflix while raising his price target by $100 to $500.