Netflix wants you to know: It doesn’t have any plans now or in the future to start running commercials on its streaming service.
Company execs have have regularly explained that being ad-free is a core part of Netflix’s attractiveness to consumers, and the strategy has been a standard part of its “Long-Term View” mission statement for investors: “We don’t offer pay-per-view or free ad-supported content. Those are fine business models that other firms do well. We are about flat-fee unlimited viewing commercial-free.”
On Wednesday, as part of announcing second-quarter 2019 earnings, Netflix spelled out in no uncertain terms that it’s not going to be putting ads in front of its viewers.
“We, like HBO, are advertising free,” the company said in its letter to investors. “That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”
There’s been regular speculation that Netflix could be tempted into rolling into selling ads — or that the company would be forced to in order to sustain its high levels of content spending.
In a report last month, analysts at Nomura’s Instinet calculated that Netflix could generate more than $1 billion in ad revenue per year if it launched a plan with advertising, with $700 million of that dropping to the bottom line.
But the analysis of Netflix’s potential for advertising doesn’t fully account for the fact that any ad-supported service from Netflix would cannibalize its existing business (i.e., subscribers would move down to cheaper ad plan from ad-free tiers). Moreover, it doesn’t factor in the investment that would be necessary to stand up an advertising platform and sales force.
Industry observers have ruminated about Netflix’s advertising opportunity given the long-successful dual-revenue streams of TV networks (which make money through both ads and distribution fees). Then there’s Hulu, which says it generated $1.4 billion in ad revenue in 2018 and that about 70% of its viewers are on the $5.99 plan with commercials.
During Netflix’s Q2 video interview Wednesday, CFO Spencer Neumann said the company expects to continue to increase margins — without selling advertising — by increasing the scale of its user base. Netflix projects that it will be able to hit a “multiple” of its current 151.6 million subscriber base.
“Our calculus now for building a global network is that we’re best served to focus on that single revenue stream… and offer [the service] at a reasonable price,” Neumann said. “We think the subscription model is a terrific model for us.”