Netflix facing more ad 'urgency' in improving second half - J.P. Morgan
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Netflix (NASDAQ:NFLX) is facing some increased urgency around its plan to roll out advertising support, J.P. Morgan says, with the focus around those plans getting more intense, and amid some ongoing caution about subscriber growth plans in coming quarters.
At the Cannes Lions conference, co-CEO Ted Sarandos confirmed that Netflix is talking to "all" the partners in building a service tier that would be lower-priced due to advertising.
That rollout looks like it's sped up into later in 2022, J.P. Morgan analyst Doug Anmuth says, even if Netflix cautions that the plan will iterate quickly, and soon may not look like it did at the start. It will also take some time for Netflix's advertising ARM - effectively, its average revenue per user - to ramp up to close the monetization gap, he noted.
And Netflix (NFLX) is likely to time the rollout of ads with a simultaneous effort to crack down on password sharing, Anmuth says. "Tightening up around even some of the 100M account sharers globally could be effectively viewed as a price increase. Launching the ad-supported tier simultaneously could offset some of the impact to members by providing a lower-cost option."
The company can be successful with both initiatives over time, he says, even if investors are concerned about execution and account trade-down risk. Netflix doesn't exactly have advertising "in its DNA," but it does have several hundred million viewers with the average household still spending two-plus hours per day on the platform, he points out.
Based in large part on some macro weakness, J.P. Morgan has cut subscriber estimates: It sees second-quarter net adds as worse than company guidance (-2.75M, vs. guidance for -2M), and now expects 2022 net adds of 4.3M, factoring in 7.25M adds in the second half - that based on some expected improvement in the second half: more distance from the COVID-19 pandemic and major-market price increases; more favorable seasonality; and an ongoing build in content.
A Netflix executive has suggested one path for improving subscriber growth may lie in its approach to the Asia Pacific region.