Are ads in vogue? Big Streaming Corps increases ad-supported offers
Last April, Netflix made the surprise announcement that it was ready to offer an ad-supported version of its popular streaming service. Later, they made this announcement a reality and announced that they would do so through a partnership with Microsoft. This represents a major shift in Netflix’s business strategy, as their previous business model relied entirely on paid subscriptions, even going so far as to limit product placement within their original content. Historically, this trading strategy has served them very well, as their stock has returned over 3,500% during the 2010s, making it the best performing stock of the decade. Are ads in vogue? Big Streaming Corps increases ad-supported offers
Every time a company with such a history of high performance changes its business model, it’s worth noting. This is especially true due to the sheer size of Netflix – despite increased competition in recent years, it remains the biggest streaming service in the world. It currently claims over 200 million subscribers. According to a recent Nielsen report, it’s also the most-watched streaming service, with around 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 appear to be an isolated incident. Disney recently announced plans to introduce an ad-supported plan for Disney+, which would cost $7.99 per month, and raise ad-free subscription prices to $10.99. Disney said on its website that “expanding access to Disney+ to a wider audience at a lower price is a win for everyone – consumers, advertisers and our storytellers.” Disney’s shift to an ad-supported Disney+ is an attempt to hit its goal of over 230 million subscribers worldwide by 2024, which looks a lot tougher as domestic growth is on the cusp. to become negative. Disney currently owns a majority stake in Hulu, so it’s exposed to ad-supported streaming.
Most recently, on August 4, the CEO of Warner Bros. Discovery’s David Zaslav has announced that his company, which owns HBO, is considering a free, ad-supported streaming service. This announcement follows a loss of $3.4 billion for the second quarter of 2022. Completely free ad-supported content is already available to consumers. Peacock, Tubi, and Freevee, owned by Comcast, Fox, and Amazon, respectively, are just some of the streaming services that are free or with a free subscription plan; However, unlike Warner Bros. Discovery, neither of these companies is a major player in the world of streaming. Although Amazon has many subscribers, its focus is not on streaming in the same way as Disney, Netflix, and Warners Bros. Discover are.
At this point, one wonders what kind of impact ads can have on the bottom line of these companies. When people think of ad-supported streaming services, they might think of YouTube or Freevee, both of which have little original content and generally offer substandard content. However, this should not be confused with low profit potential. In 2021, Netflix brought in just under $29.7 billion in revenue. However, Google reported that YouTube’s ad revenue for 2021 was $28.8 billion. This demonstrates the incredible power of ads. YouTube’s ad revenue was nearly equal to Netflix’s, and their ad revenue growth was much larger than Netflix’s. From 2020 to 2021, YouTube’s revenue growth was around 45.8%, while Netflix’s revenue growth for this period was only 18.8%. If growth continues at a similar pace, YouTube will generate more ad revenue than Netflix in total revenue by the end of this year.
This growth may help explain why so many businesses are turning to ads: if they become more profitable, the opportunity cost may be too high to ignore. Google, in its 10-K, said an improvement in ad format and delivery was one of the factors behind the increase in ad revenue. With these improvements, advertisers are ready to pay more and therefore increase the margins of the companies providing the advertising services.
No matter how good an ad, it takes a lot more to be successful. A company like LVMH, the conglomerate that owns luxury brands like Louis Vuitton and Dior, is more likely to find success in fashion magazines like Vogue or Vanity Fair than Popular Mechanics. Although this is an extreme example, the concept is easy to understand: a big part of advertising is getting them to the right people. One way to ensure that digital ads reach the right consumers has the potential to be very useful to advertisers and to be very profitable. A company specializing in this area, The Trade Desk, is trading, as of mid-August 2022, at a P/E ratio of over 1,000. A company’s P/E ratio is the price/earnings ratio and represents the multiple of a company’s earnings at which the combined value of all its shares trades. If a company has a high P/E ratio, it means that the stock value is several times higher than what the company is currently earning and as such is usually a sign that investors are expecting what she earns much more in the future. If he was not expected to earn much more in the future, investors would not be willing to pay such a premium. This means that higher P/E ratios are generally associated with companies with high earnings potential. To highlight the importance of a P/E ratio above 1,000, 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 see a substantial increase in earnings going forward.
What does The Trade Desk do? It operates a marketplace to connect companies wishing to advertise with the best possible advertisers for them. Much of the way they do this is with data they collect from various sources. They then use this data to help companies focus their spend more on ads that work best for them and less on ads that are less beneficial. Companies like Netflix, Disney and Warner Bros. Discovery will be particularly good at using strategies like this. Since they have access to what customers are watching, they can build a profile on those customers regarding which ads they would most like to see, and also show ads in the most ideal place in a movie. Think of seeing a car in a freeway chase in an action movie and then seeing an advertisement for that car. This is very similar to traditional product placement in movies, which can be very large, often valued at tens of millions of dollars for major movies.
It’s likely that targeted ads technology will help companies providing digital ads become much more profitable. Many investors believe that this form of advertising has substantial growth potential. Perhaps that’s one of the reasons why so many businesses that once rejected advertising are now turning to it. While there are other influential reasons that likely influenced their decisions as well, consumers’ slumping spending habits in the face of runaway inflation and slowing subscriber growth in recent quarters are the most apparent. More effective advertisements capable of generating higher profits than in the past may be too tempting to avoid.
Photo caption: Netflix Logo
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