Netflix Shares Sink After Report of Weaker Ad Demand

Netflix Shares Sink After Report of Weaker Ad Demand

Shares of Netflix took a hit Thursday, after a report that the company’s new advertising tier has not hit its viewership targets.

The stock closed Thursday at $290.41, after dropping about 9 percent throughout the day. 

A Digiday report said that Netflix had allowed advertisers to take back money for ads that had not yet run. The Thursday report cites some instances in which Netflix had only delivered about 80 percent of the expected audience to advertisers. 

The company’s new ad tier launched in the U.S. on Nov. 3, offering consumers a lower price point of $6.99 as compared to the ad-free tier. The ad-tier can’t currently offer all Netflix titles, due to licensing restrictions, which leaves out about 5 to 10 percent of titles, the company said in October. 

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In October, Netflix said it expected four to five minutes of ads to play per hour. And at the time Jeremi Gorman, president of worldwide advertising at Netflix, said the company had “hundreds” of advertisers, and were nearly sold out.

Tim Nollen, Macquarie’s senior media tech analyst, viewed the current issue as a sign of a product still early in its development. In the long run, Nollen said “it doesn’t really matter,” as he expects the audience to grow later on. He added that he expects Netflix to use more ad tech services to help manage advertisements. 

“We don’t believe this should come as a surprise, as ad impressions delivered depend on the number of people viewing them, and Netflix with ads only got off the ground six weeks ago,” Noellen wrote. “As we wrote in our Netflix upgrade in September, we believe the service will succeed by drawing users from higher ad-free tiers to this lower-price tier rather than adding new subscribers, but it could take a couple of years to build a large-enough user base to become a meaningful destination for advertisers.”

Netflix management had given similar warnings, with executives repeatedly emphasizing the “crawl, walk, run” progression of the ad-tier launch. Netflix COO Greg Peters repeated this point in October, saying the tier still had limited ad targeting, which he expected to improve over the next several quarters. 

Still, analysts had been lauding the launch of the new tier since it was unveiled this fall. In October, Evercore ISI analyst Mark Mahaney called the ad tier “the biggest catalyst across the internet sector.”

Cowen analyst John Blackledge, and many others, saw it as a big driver of subscribers for the streaming service, and a key method of reducing churn among existing Netflix subscribers. “We believe that the new tier could drive an incremental approximately 4 million subs in the U.S. alone and should drive further sub penetration,” Blackledge said in October. 

It is also expected to boost revenues at Netflix, as well as at other streamers hoping to make the services profitable, including at Disney and Warner Bros. Discovery.  

The new Disney+ ad tier launched Dec. 8. At that time, Disney said more than 100 advertisers had signed on in a dozen categories, including retail, automotive and CPG. Disney promised that advertisers would have “volume and variety” in order to reduce the number of repetitive ad spots. The results of that are yet to be seen.