Netflix's ads tier is growing but it's not the savior the company hoped for — yet
Last year they were telling a different story about ads profitability.
A year ago, Netflix said it was making more money from ads subscriptions than the more expensive ad-free options. During 2023’s Q2 earnings call, Chief Financial Officer Spence Neumann said, “Our overall ads ARM continues to be higher than basic ad free globally,” referring to average revenue per membership, which is a combination of the subscription fee and ads revenue.
That seems to have changed. “Currently our ads ARM is lower than our non-ads ARM,” Co-CEO Greg Peters said on the earnings call yesterday.
What happened?
“Currently because we've been scaling so rapidly, we're racing behind essentially to fulfill all of that increasing inventory. And we're lagging in that regard,” Peters said.
In other words, it seems people are signing up for the ads tier so quickly, Netflix has more room to show ads than it has deals with advertisers or the ad tech is not good enough to meet this increased demand, meaning they are not able to effectively monetize all these new views with ads.
“We're on track to achieve our critical scale goals for all of our ads countries in 2025,” he said.
“We're adding more sales folks. We're adding more ads operation folks, building our capabilities to meet advertisers. A big component of that is giving advertisers more effective ways to buy Netflix.”
Netflix already appears to be shaking up its ad team. Yesterday, media industry vet Peter Naylor became the second of two senior executives to leave the ad team.
Netflix introduced its lower cost ads tier in limited markets a year and half ago. In May the company said its ad-supported tier had 40 million global subscribers, or almost double what it was in January. That meant ads subscribers represented about 15% of all subscriptions.
Netflix reported that this quarter its ads tier grew 34% from last quarter, but didn’t say how many subscribers that was. It did say a full 45% of new signups in ads markets was for the ad tier last quarter, growing from 40% in Q1.
For now, Neumann called ads a “meaningful contributor” to the streaming company’s revenue.
“When you get into 2026 and beyond, it can be even more meaningful, and hopefully it becomes the point where it is a primary contributor given all that engagement and reach that we're building,” he said.
