Dive Brief:

• Netflix's revenue grew nearly 3% in Q2 2023 to $8.2 billion, according to the company's latest earnings report. Paid subscriptions increased by 5.9 million, with sign-ups exceeding cancellations.
• While membership to its ad-supported plan has nearly doubled since Q1, revenue from that part of the business is not yet “material” to the company’s bottom line, per a letter to shareholders. 
• Executives on an earnings call detailed the progress of the nascent ad business, which could see increased attention as the company continues to phase out its basic ads-free plan around the globe.

Dive Insight:

Netflix's latest earnings period saw growth in both revenue and subscribers that the streaming company attributed to the rollout of paid sharing — its euphemistic term for a crackdown on password sharing that had begun to negatively affect revenue. The company is also pushing users to higher-cost plans or ad-supported ones and is no longer offering a basic ad-free plan in the U.S. and U.K. after initially phasing out the option in Canada.

While much attention has been paid to Netflix's ad-supported tier, which launched in November 2022, the company's advertising business is not yet having a material effect on the bottom line. Ad plan membership grew almost 100% versus the prior quarter. 

"Building an ads business from scratch isn’t easy and we have lots of hard work ahead, but we’re confident that over time we can develop advertising into a multi-billion dollar incremental revenue stream," the company said in a letter to shareholders.

Executives on the company's earnings call provided some detail about its progress on the advertising front. Major priorities include building out scale and advertiser-facing features that are table stakes for a digital ad business, including verification, measurement and targeting, explained Greg Peters, Netflix's co-CEO, president and director, on the call.

“There’s just tons of work ahead of us, tons of opportunity, and we’re really focused on continual improvement. And we’re also confident that all the fundamentals are there and that we can build over those several years, a material ads business,” Peters said.

Part of that work is standing up its ad-tech infrastructure, both internally and alongside global ad-tech and sales partner Microsoft. Netflix has “tens of engineers” working to ramp up its ad-tech capabilities, per Peters. Eventually, the company could end its partnership with Microsoft once its build-out is complete, a Hollywood marketing executive previously told the Financial Times.

The company remains confident that its ad business will eventually generate 10% of its revenue. While it anticipates drawing from both linear and digital ad spending budgets, Netflix is currently more focused on linear, brand-focused TV advertising spend.

“That’s the sweet spot that we can speak to right now. We’re definitely building capabilities and have an aspiration to build capabilities that over time will allow us to expand that envelope,” Peters said. “There’s a lot of dollars there. There’s a lot of dollars looking for great consumers to connect with and we think we can provide that solution.”