Bearish Analyst Sees Risks In Netflix Ad-Tier Strategy

Netflix Hollywood HQ
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Citing a long list of risks involved in Netflix’s move to create an ad-supported tier, Pivotal Research principal and senior analyst Jeff Wlodarczak reiterated his sell recommendation on the streaming company.

In a note headlined “Ad-Supported Excitement Looks Misplaced,” Wlodarczak said Neflix is taking a chance in terms of average revenue per user (ARPU), tech, product perception and results variability that the market doesn’t seem to appreciate based on Netflix’s current stock prices.

“In the end, this is not rocket science, we view Netflix’s move to launch an ad-supported alternative as fraught with ARPU, technological, financial and product risk,” he said. “If Netflix were an upstart player looking to add subscribers, ad-supported could be a no-brainer, but as the incumbent operator it seems to offer more risk than reward.”

Also: Analyst: Adding Commercials Will Boost Netflix Subscribers by 6% and Earnings by 20% in 2025

Netflix is already fully penetrated in the key North American market, Wlodarczak noted, so launching a cheaper ad-supported tier is an invitation to trade down to a cheaper service as streaming competition intensifies.

At the same time, Netflix is looking to get very high rates for its ads at a time when the ad-spending outlook faces clouds from a possible recession. At the same time, more publishers are jumping into ad-supported streaming, creating the potential for a glut of inventory.

“We also believe a lower-cost, ad-supported version of Netflix arguably taints the Netflix brand and the tech behind successful advertising delivery is very difficult,” he said, adding that Microsoft might not have been the strongest partner in ad tech and that Netflix programming is not optimized for ad breaks.

In his note, Wlodarczak sees ways that could prove Netflix right — and himself wrong. Netflix could manage the “complicated transition” without hiccups and the move could bring short-term subscriber growth and better monetization (with ads, as well as cutting down on password-sharing). The ad move could also continue to distract the market from subscriber losses in the U.S. and Canada. 

Finally, he noted that Netflix co-CEO Reed Hastings “likely” wants to sell the company, possibly to Microsoft. “A sale to a large tech company is unlikely until ‘25 at the earliest and would assume a Republican administration is in power to clear regulatory hurdles,” he said. ■

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.