Netflix ad revenues poised to hit $2.7B by 2025 – forecast

Netflix's ad-supported service strategy is still taking shape, but industry analysts are starting to make estimates on how quickly this emerging piece of the company's business will materialize with respect to both revenues and subscriber growth.

Following an earlier forecast that Netflix's domestic advertising revenues could hit about $1.2 billion by 2025, MoffettNathanson, armed with more details about the potential pricing and rollout plans Netflix has in mind, now expects the streaming company's global ad play to generate about $2.7 billion in advertising revenues by 2025. The estimate includes $1.7 billion in from Netflix's US and Canada (UCAN) business and $1 billion from the rest of the globe.

Figure 1: (Source: Netflix)

Though Netflix's coming ad play won't make much of a dent in 2022, it is expected to reach the $1 billion mark sometime in 2023.

"To be clear, due to an initial low volume of impressions, it is obviously unlikely that Netflix will see any real ad-revenues this year even if it launches its ad-supported offering as imminently as next month," MoffettNathanson analyst Michael Nathanson explained in a new report (registration required) sizing up Netflix's budding ad business.

Nathanson believes that Netflix's ad revenues "can ramp up quickly in 2023 to reach $1 billion" – $700 million from UCAN and $300 million from about ten international markets that are expected to launch ad-supported tiers. The international projection is in reference to a report in The Wall Street Journal (WSJ) stating that Netflix already has its advertising sights set on ten non-UCAN markets: the U.K., Germany, Italy, Spain, France, Brazil, Mexico, South Korea, Japan and Australia.

Citing a document that Netflix has shared with ad buyers, WSJ said the streamer is projecting 4.4 million unique viewers worldwide at the end of 2022, growing to more than 40 million unique viewers by Q3 2023. Those viewers will exceed the number of subs on ad-supporting plans, the publication added, as it's likely that more than one person in a given subscribing household will be watching the service.

While Netflix's ad business is estimated to start driving in more than $1 billion in revenues next year and perhaps as much as $3.5 billion in 2027, that element will still represent a small slice of Netflix's overall pie.

Figure 2: Click here for a larger version of this image.

Hoping to revive subscriber growth

Another aim of Netflix's ad plan is to rejuvenate subscriber growth with less expensive plans. Industry watchers anticipate an initial price in the US of $7.99 per month for an ad-supported plan, $2 less than Netflix's current base offering.

If that's the starting point in the US and representative of what will be marketed internationally, Nathanson forecasts that Netflix will add a "modest" 1.8 million subs to the ad-supported tier in 2022. That's based on the assumption that Netflix will launch its ad-supported option by the middle of Q4 2022.

From there, Nathanson expects the number to rise to 21.5 million subs in 2023 and 39 million by 2025. He expects it to exceed 48 million by 2027 (Netflix had more than 220 million subs on its existing ad-free tiers at the end of Q2 2022).

However, the analyst expects most of the initial growth spurred by the ad-supported tier to come from "existing subscribers spinning down." To wit, Nathanson's estimate of 1.8 million ad-supported subs in 2022 will only increase the company's total subscriber count by 200,000. Incremental additions driven by the new ad-supported option are expected to improve in 2023, however, to 4.1 million new subscribers.

"The balancing act Netflix must carefully weigh is providing an entry price or initial discounted offer that attracts new subscribers to its ad tier while at the same time not making it too attractive for existing subscribers of their two highest-priced plans to spin down to the cheaper package, offsetting the incremental advertising revenues," Nathanson explained.

With his new ad-related forecasts tied in, Nathanson maintained his "Market Perform" rating on Netflix but raised his price target by +$30, to $220.

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— Jeff Baumgartner, Senior Editor, Light Reading