Netflix Ad-Supported Tier Will Have Better Economics Than Ad-Free One, COO Greg Peters Says

The economics of Netflix’s forthcoming ad-supported tier will be more favorable than those of its primary ad-free one, one senior executive indicated during the company’s second-quarter earnings interview.

Greg Peters, the company’s head of product and chief operating officer, offered detailed commentary about the strategic push into advertising. Co-CEO Reed Hastings stunned the entertainment industry, Wall Street and Madison Avenue by revealing last quarter that the company was planning to roll out an ad-supported tier.

Asked during the company’s quarterly earnings interview about the outlook for customers of the ad-free service “trading down” to the cheaper, ad-supported one, Peters said the company doesn’t see any downside risk in that sort of shift.

“We know there’s some price sensitivity around consumers,” he said. “When we’ve run the models and in talking to our members and advertisers, to Microsoft, we look at the monetization that is a complement to the subscription part of that offering and we’re quite optimistic that the unit economics work to make that monetization equal or maybe even better than what we would see on the comparable (ad-free) side.”

By attracting (in theory) more members lured by a lower price point, Netflix will prosper as a business, Peters said, it will be “neutral to positive” for the overall business. Market demand, he reiterated, is “quite strong,” which will help overall volume of advertising.

CFO Spence Neumann didn’t offer an expected percentage, but he echoed the comments by Peters by stressing that “it’s not like all of a sudden all folks on ad-free Netflix are going to join ad Netflix. Supply-demand works in our favor, both in terms of geography and in terms of opening up the aperture.”

Netflix earlier today reported better-than-expected second-quarter results, with a loss of 970,000 subscribers — far narrower than the 2-plus million forecast by most analysts and about half the worst end of the company’s own predicted range.

The move toward ads is expected to happen “through a period of years and iteratively, so I want to set expectations at the onset,” Peters said. “This is what we call the crawl/walk/run model. At the beginning it will look like what you’re familiar with, but over time we think there’s a tremendous opportunity to leverage that innovation DNA that we have as well as a bunch of enabling characteristics of addressibility and measurability and things like that.”

Once the ad tier is up and running by early 2023, Peters predicted, the company will over the coming years be able to develop an ad offering that is “fundamentally different” from traditional linear TV.

In addition to Microsoft, which was confirmed last week as Netflix’s partner in the ad-supported effort, Peters said there has been “a lot of excitement in our early discussions with brands and holding companies and agencies,” reflecting pent-up interest in incorporating commercial messages in Netflix programming.

There remain many unanswered questions about the ad tier, chief among them pricing. Beyond that, it isn’t yet clear what kind of ad experience Netflix plans to offer. In a notable departure from the company’s longtime refusal to even acknowledge competitors by name, Hastings on last quarter’s call lavished praise on Hulu and Disney for their progress in ad-supported streaming.

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