Analyst Gives Thumbs-Up to Netflix Ads, Shrugs Off Account Sharing

Following the market’s outsized reaction to Netflix’s underwhelming first quarter results, including a net loss of 200,000 subscribers, the SVOD pioneer put in motion two initiatives designed to generate incremental revenue: Charging subs extra for sharing accounts and a less expensive ad-supported subscription plan.

Selling ads on the backs of Netflix’s 220 million global subscribers is being embraced by Wall Street as a legitimate revenue driver. Jason Bazinet, media analyst with Citi, believes the move could jumpstart subscriber growth and improve the fiscal bottom line.

“We believe an ad-based tier — which we expect in 2023 — will allow Netflix to resume sub growth and help narrow the ~$5 billion gap between [free cash flow] and net income,” Bazinet wrote in a note.

Citi analyst Jason Bazinet

Free cash remains a bone of contention among some Netflix analysts (notably Wedbush Securities’ Michael Pachter] who suggest the service spends too much money on content, among other costs.

Bazinet believes Netflix could generate $10 monthly from ad-supported U.S. subs and $3 monthly worldwide. The analyst says the ad-supported subscription plan could yield upwards of $3.6 billion in additional free cash flow from new subs, and $3.1 billion should existing subs downgrade to the estimated new $5.99 monthly ad-supported price point.

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“[This would] still generate incremental revenue from basic subs that spin down to a lower cost version,” Bazinet wrote.

The analyst doesn’t give much support to Netflix idea to charge existing subs an incremental fee when sharing account passwords. The concept is currently being tested in select markets globally.

The move is “unlikely to improve [churn] beyond current levels,” Bazinet wrote.

A separate report by The Information suggested Netflix could bump revenue up 21% with an ad-supported subscription option.

Analyst: Password Sharing Costs Netflix $6.2 Billion Annually

Netflix recently began cracking down on subscribers sharing their passwords with non-members, and with good reason. New data from Citi Global Markets analyst Jason Bazinet contends the SVOD behemoth is losing about $6.2 billion each year in potential revenue when non-subs stream content using someone else’s password.

Specifically, Bazinet contends subscription streaming video services in the U.S. lose about $25 billion annually from shared passwords. Netflix’s 2020 revenue totaled $25 billion.

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“As streaming services move to center stage, thwarting this theft will be of growing importance for shareholders,” Bazinet wrote in a note.

Research firm Magid suggests 33% of all subs across the SVOD market in the U.S. share passwords, while Bank of America Securities contends Netflix could significantly enhance sluggish domestic sub growth by getting tougher on shared passwords.

“And cracking down on that could be a potential tailwind to net additions,” BofA analyst Nat Schindler wrote in a recent note.

Schindler says Netflix has around 204 million paid global subscribers, while adding a record 37 million new subs in 2020. But citing an internal survey, the analyst said the SVOD giant could have added even more subs.

“In our streaming survey, we asked a pool of Netflix subs if they shared the service with another household … and 26% said they did, and 50% of these said it was shared with family in multiple locations,” Schindler wrote.

The analyst suggests Netflix offer a lower-cost subscription tier for budget-conscious consumers, which, when combined with a crackdown on password sharing, would provide “a boost to net subscriber adds.”

 

Roku Firing on All Cylinders During Pandemic

With the coronavirus pandemic throwing conventional entertainment consumption on its ear, streaming video device pioneer Roku has emerged a star on Wall Street as increasing numbers of consumers migrate to over-the-top video.

Roku, together with Netflix more than 12 years ago, helped create the subscription streaming VOD market. It now markets a line of Chinese-made smart televisions, in addition to a branded operating system for third-party consumer electronics. The San Jose, Calif.-based company operates an ad-supported VOD platform, The Roku Channel, and boasts more than 40 million platform subscribers.

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In its most-recent fiscal period, Roku saw revenue surge 41% to $43 million, with streaming hours skyrocketing 65% to 14.6 billion. Average revenue per subscribers rose 18% to $24.92 — underscoring the fact a lot of people use Roku to access third-party streaming services such as Netflix, Disney+, Amazon Prime Video and Hulu.

Last Friday, Roku joined Apple and Google in distributing the Sept. 4 premium VOD (dubbed “Premier Access” by Disney) debut of the much-delayed live-action film adaptation of Mulan.

Citigroup Research analyst Jason Bazinet, in an Aug. 26 note, believes Roku will increase its platform sub base to 125 million subs by 2022, with revenue per active account growing from $23 in 2019 to $32  in the next two years.

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“In the U.S., we think there are just two firms: Netflix and Roku,” Bazinet wrote. “Their business models couldn’t be more different. But, the fate of the equity we suspect is similar. Both turn on sub growth and rising value per sub.”

Indeed, with increased numbers of consumers housebound due to the pandemic, the stay-at-home market has proven a boon for Roku with platform and player revenue up 46% and 35%, respectively, since last year.

But Roku is hedging much of its future on AVOD, contending that the traditional linear TV business model will migrate to connected televisions it either manufactures and/or empowers.

According to Magna Global, U.S. TV ad spending is expected to decline 24% and domestic digital ad spending is projected to drop 5%. Roku claims its monetized video ad impressions grew about 50% in the most-recent fiscal quarter — with first-time ad buyers up 40% year-on-year. The retention rate among advertisers spending $1 million or more in the first half of 2019 was 92%.

“Our performance advertising business, a newer category catering to direct response advertisers, grew 346% year-over-year, aided in part by marketers re-evaluating their social media spending,” CEO Anthony Wood and CFO Steve Louden wrote in the shareholder letter.

In June, Roku launched “OneView Ad Platform,” a proprietary shopper data partnership with supermarket giant Kroger that targets and measures advertising using retail purchase data.

“When we look at the major tech players, there doesn’t seem to be dominant IPTV strategy,” Bazinet wrote. “Alphabet [parent of Google/YouTube) and Roku cover the entire waterfront: they sell IPTV hardware, push their TV OS and hope to monetize IP video with their app that sits inside the OS.

“Other players such as Amazon, Apple and Netflix are more focused on a narrower slice of IPTV opportunities.”