Who will be the winners from the ads on Netflix

By Jon Markman

Digital ads are… on their way to Netflix in a landmark development for the media and entertainment industries that is expected to impact investors as well.

Ted Sarandos, CEO of Netflix, confirmed last week that the platform will soon “play” ads. A company turnaround that investors in Netflix, The Trade Desk, Alphabet (parent of Google) and other players from the digital advertising space are eagerly awaiting.

Netflix is ​​undoubtedly the most important entertainment media company in the world. In 2021, the Los Gatos, California-based company spent $17 billion on production. With 220 million paid subscribers, Netflix is ​​”the elephant in the room.”

Since the platform launched in 2007 with streaming content, company executives have been staunchly opposed to serving ads. They argued that Netflix’s value lay in uninterrupted on-demand entertainment. It was the differentiator of the platform and the audience followed in droves.

At the Consumer Electronics Show in 2019, executives from major TV makers were touting deals that brought the Netflix app to their flat screens. TVs, they argued, weren’t as attractive without Netflix.

Ads change everything. It’s the “vacation” Sarandos said would never come. But growth began to slow. The company announced in April that it lost 200,000 subscribers in the first quarter of the year.

A cheaper ad-supported subscription package might give a new boost to subscriber numbers, but not without a price.

Sarandos told The Hollywood Reporter last week that the ads will bring Netflix to customers who otherwise wouldn’t be able to afford the service. He’s probably right, especially in emerging markets. The introduction of advertisements on the platform is also likely to attract existing subscribers who would not mind a break in content if their monthly fee is reduced.

If early reactions to the platform’s ad-serving announcement are any indication, Netflix investors are likely to start selling shares amid concerns about profit margins — a factor that will weigh against Netflix’s stock in the short term.

In the long run, though, Netflix ads will bring significant profits to The Trade Desk and Alphabet.

The former operates a programmatic digital advertising platform. Brands use its software to buy digital ads in real time and then place those ads on connected TVs, the web and other digital venues. Global Netflix is ​​the ultimate connected TV platform.

In the short term, there might be some risks for Trade Desk shareholders. And that’s because there have been credible reports that Netflix will partner with Google or NBCUniversal to sell ads.

I estimate that investors will first sell Trade Desk shares and then consider what this partnership means.

NBCUniversal would be an odd choice for Netflix. Today, the company collaborates on the advertising party with Netflix competitors Apple and Peacock.

Google is a more interesting case. On YouTube, it is at the same sales level as Netflix and growing faster, while it also collaborates on advertising content with Walt Disney – another competitor of Netflix. But at the same time, the company is a pioneer in digital advertising, having the largest network and the exciting Google Cloud. A partnership with Netflix, both on the advertising level and – later – on the cloud computing level, would be a big win that would undoubtedly push the stock prices higher.

Additionally, Netflix’s potential move to Google Cloud would be a big loss for Amazon.com, the current provider through Amazon Web Services.

What does all this mean? In the short term (almost) all roads lead to a fall in stocks. For now, investors believe that adding ads to Netflix will work negatively for the industry.

In the long run, however, this view is the opposite of the truth.

Netflix’s entry into the digital advertising space is a game changer for the better. It means worldwide targeted ads on the leading TV connected platform. It means more digital ad space. At the same time, it will accelerate the transition to digital advertising over analog. In general, it completely changes the data.

The opportunity lies in the fact that investors will need some time to realize the new situation.