Netflix won't say 'never' to ads, as rivals set up cheaper streaming tiers
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Netflix's (NASDAQ:NFLX) formerly firm stance against allowing ads on its leading streaming service appears to be a little softer today, with Chief Financial Officer Spencer Neumann saying "never say never."
Asked at a Morgan Stanley conference about Disney's (NYSE:DIS) move to develop a cheaper ad-supported version of Disney+, Neumann appeared to walk back some previously stern commentary against ads on Netflix. With rivals including HBO Max (NYSE:T), Discovery (NASDAQ:DISCA), Paramount (PARA, PARAA) and NBCUniversal (NASDAQ:CMCSA) supporting an ad tier, Disney's move leaves Netflix as the only major streamer without an ad-supported option.
"I'd love to get like a show of hands of if you like that decision by them, but I don't think I'll get it," Neumann says of Disney's move. "Now for us, it's not like we have religion against advertising to be clear."
It's not in the company's plans, but that could change if "we determine something that we have the right to kind of play within the space and it meets those dimensions," he says.
Netflix's growth is healthy across every region globally and "we have a really nice scalable subscription model, and again, never say never, but it's not in our plan, but other folks are learning from it."
A key question for the company in recent earnings has been whether it can reaccelerate net subscriber addition growth, given some heavy penetration in its mature markets (U.S./Canada) but more opportunity in global markets in Asia Pacific and Europe/Middle East/Africa.
While growth in recent quarters has generally come overseas, "we had the biggest growth in the UCAN (U.S./Canada) market" in the fourth quarter, about 1.2 million paid net adds (though guidance indicates a slowdown as it goes through U.S. price hikes).
There's room for better penetration in other markets, but "it's still early in the scheme of things," Neumann says. "And we are small relative to every kind of metric we look at, whether it's the hundreds of billions of dollars to spend directly on direct-to-consumer entertainment, whether it's the fact that there's over 700 pay TV households around the world, nearly 1 billion broadband houses (ex-China). ... Our share of TV time, we talked about this a lot, we're less than 10% share of TV time in our most penetrated market in the U.S."
Looking at the U.S. as a "leading indicator," meanwhile, points the way to doubling up its subscriber base in time, Neumann indicates: "There's probably 1 billion connected TVs around the world. And you can see our penetration in the U.S., that you kind of do that math, we're roughly 60% penetrated today. So, that pretty quickly gets us to business that's over 0.5 billion members."
On the factors affecting price increase such as the one Netflix has embarked on in its home market: Factors are generally the same around the world, but "at the same time, we don't ignore competition, right? ... That would be silly. But at the end of the day, we're pricing for what we believe is the value we provide and ... the business we're trying to build."
Talk of Netflix's foray into games brings some qualifiers - it's not going to be a big part of the business in the coming year, but "I hope it's a big part of our business in a decade" - and a bit of detail: "Now we're kind of learning what are the games that our members enjoy. ... "And so we're starting to get a sense as to what that looks like in terms of retention and hours played and trying to get insights into how they value that versus film and TV content. So it's a learning year."
As for a potentially big ramp-up in free cash flow, Neumann generally stuck to recent company lines.
"We'll maintain $10 billion to $15 billion of gross leverage. We paid down $700 million of debt in February, which puts us now at the high end -- inside the high end of that range. We'll continue to grow our cash flow," he says.
Free cash flow will be "first and foremost" invested strategically in the business. "You've seen we'll do M&A not as a strategy, but as an accelerator, a tactical accelerator to our growth." What's left over will mean a healthy amount on the balance sheet: "Right now, it's two months of revenue. And then beyond that, we'll repurchase our shares opportunistically, and we've done that as well with the excess cash. So we're not like -- there's not like a debt-to-EBITDA ratio that we're targeting."
Check out more details from Neumann's conference conversation.