Marcus Johnson (00:04):

Hey gang, it's Monday, April 27th. Danny Ross and listeners, welcome to Behind the Numbers, an eMarketer podcast. I'm Marcus, and joining me for today's conversation, we have two New York people. One of them is in Brooklyn, our senior editor of the Marketing and Advertising Briefing. It's Daniel Konstantinovic.

Daniel Konstantinovic (00:21):

Hello. I'm actually in Queens now, so-

Marcus Johnson (00:23):

Ah.

Daniel Konstantinovic (00:24):

... I can't claim Brooklyn anymore.

Marcus Johnson (00:25):

Stay still. Congratulations on the move. When did you move? Oh, you did move.

Daniel Konstantinovic (00:30):

Like two years ago.

Marcus Johnson (00:31):

You moved a really long-

Daniel Konstantinovic (00:32):

But you know.

Marcus Johnson (00:32):

... time ago. Yeah. You're still in Brooklyn in my head.

Ross Benes (00:36):

Marcus, you've probably been in-

Daniel Konstantinovic (00:36):

In my heart.

Ross Benes (00:36):

... a dozen cities during that time.

Daniel Konstantinovic (00:39):

That's true.

Marcus Johnson (00:39):

Let's blame it on that.

Daniel Konstantinovic (00:40):

Who can keep track?

Marcus Johnson (00:40):

Thanks, Ross. He's in Queens now, but there he is. Danny Konstantinovic, also joined by another gentleman who is just north of the city, I believe. Maybe he's moved too. Senior analyst covering digital advertising in media, Ross Benish.

Ross Benes (00:55):

Hey, I haven't moved because it's hard to do that with kids.

Marcus Johnson (00:59):

Virtually impossible. Anyway, today's fact, here's where we start. Where did the US national anthem come from? So-

Daniel Konstantinovic (01:12):

Oh no.

Marcus Johnson (01:14):

Do you learn this in school?

Daniel Konstantinovic (01:16):

For sure, but, you know-

Marcus Johnson (01:17):

Oh, okay.

Ross Benes (01:19):

Isn't it this drinking song?

Marcus Johnson (01:22):

Was it a drinking song? America.

Daniel Konstantinovic (01:26):

It was a... Well, should we answer, or do you have a-

Marcus Johnson (01:28):

If you know, I had no idea. So I think it's a tough question. Unless you were taught this in schools and you forgot it, then shame on you. But if you didn't know, I wouldn't be surprised. But if nothing comes to mind, I can just say it.

Daniel Konstantinovic (01:40):

No, I mean-

Marcus Johnson (01:40):

The Star-Spangled Banner... Go on.

Daniel Konstantinovic (01:43):

All right. I want to guess, it's like a wartime song, but I feel like I remember it was not written during the Revolutionary War. It was a later one, if I'm not mistaken-

Marcus Johnson (01:54):

Yeah.

Daniel Konstantinovic (01:54):

... or maybe I'm wrong. Okay. Wow.

Marcus Johnson (01:55):

No, no, no.

Daniel Konstantinovic (01:56):

Forgive me.

Marcus Johnson (01:57):

It comes from a poem written by Maryland-born Francis Scott Key in September 1814, titled Defense of Fort McHenry, the poem or anthem. So it's four verses. You basically took the first verse, and that's the national anthem. It's set to the tune of a popular British song, The Anacreontic Song by John Stafford Smith. So it has the same kind of melody, and was officially adopted as the US national anthem. March 3rd, 1931 is when it was officially adopted, but that's where it comes from.

Ross Benes (02:37):

So I thought the song it was based on was a drinking song or the poem that it was based on, like the English origin.

Marcus Johnson (02:44):

Probably.

Ross Benes (02:46):

I could just be making-

Marcus Johnson (02:47):

There's a-

Ross Benes (02:47):

... that up though.

Marcus Johnson (02:47):

... there's a good chance of that.

Ross Benes (02:48):

So I don't retain much from what I was told in high school history.

Marcus Johnson (02:51):

Who does? Anyway, today's real topic, the three big questions, we'll figure them out, surrounding Netflix. All right, folks, let's set the table first. Q1, Netflix made over $12 billion in the quarter. Growing revenue, 16%, one-six, was faster than last Q1's 13% growth. US revenue, which makes up 43% of Netflix's money, grew 14%, one-four. Also faster than last Q1's nine.

(03:25):

So, that's how Netflix did recently, but we're talking about the three big questions surrounding the company at the moment. What's on their mind? What's on our minds? What's on journalists' minds? What's on analysts' minds? Danny, I'll start with you. What's one big question for Netflix at the moment?

Daniel Konstantinovic (03:42):

I feel like a timely one is what will Netflix do or where will Netflix expand to make up for the Warner Brothers Discovery deal falling apart? But I have an asterisk to that question, which is, does it need to do anything to make up for that?

(03:58):

It's already the subscription streaming leader. It would have obviously become even larger with this Warner Brothers Discovery acquisition, but they got a tidy couple billion from the deal falling apart, which is nice for them to pocket.

(04:14):

And they still seem to be poised to stay on top for the time being. So, I'm curious what you want.

Marcus Johnson (04:22):

That's a great first question. I'd reworded it. So mine was, will leaving Warner Brothers Discovery behind be a good move long-term? Ross, what do you think? Because short-term, as Danny said, they got a tidy three billion termination fee from Paramount for not getting Warner Brothers Discovery. So that hit the bottom line and that felt good. But long-term, do you think this is going to be a miss for Netflix?

Ross Benes (04:46):

No, I thought they won by losing there, that not getting Warner Brothers Discovery was actually a good thing for them. Allows them to be more nimble and they got the termination fee, and then they have one of their biggest rivals tied up in courts and regulatory limbo for another year to two years while Netflix continues to chug along.

(05:09):

And that combined company... I can't say combined for something... That combined company of Paramount and Warner Brothers Discovery is going to struggle. They're going to have to have massive layoffs. They're going to have a huge amount of debt. So I think Netflix, by not overpaying, did the right thing for them there. And to Danny's point, what do they have to do? I'm just going to use that as a segue into something I thought as a big question, is what's Netflix's live sports strategy?

(05:43):

Because they mentioned live sports on their earnings call more. They've been doing that lately. They actually mentioned it directly in a way that they didn't before. And they kind of flirt with live sports here and there. They had MLB opening day. They'll have a few NFL games, but clearly they're building to have something more substantial than a one-off game or a one-off fight. And what is that going to be?

(06:03):

And that could be, even though it's not scripted entertainment, that could be the content that fills the hole that Warner Brothers Discoveries Content Library may have.

Daniel Konstantinovic (06:14):

Yeah, I think that's a super interesting one. On the earnings call, Greg Peters and Ted Sarandos, those are the two current co-CEOs-

Ross Benes (06:23):

Yep.

Daniel Konstantinovic (06:24):

... yes? Okay, got it. Because there were headlines bouncing around today about the former people in charge. Anyway, on the earnings call, they were talking a lot about live sports and they were talking about the NFL in particular, which I thought was really interesting.

(06:37):

And I'm hinting at one of my questions that we can get to later. I wonder what the live sports strategy is for them, because like you said, they have these one-off tennis matches, fights. They have the WWE, which is a longer term sports season, I suppose. But the NFL is the marquee livestreaming event that all these streaming services want a piece of. And Netflix has claimed bits of it.

(07:07):

It seems like now in the long term, it's going to be harder for them to claim a more meaningful share of the NFL season to broadcast on Netflix just because of the Disney ESPN NFL deal that's out there, although that's facing some regulatory scrutiny. But something that caught my eye in the earnings call was that Netflix was talking about looking for more individual games that they can eventize.

(07:35):

So they were saying that they want the season opener game is something they said they would love to have on Netflix. And that strikes me as something you can really clearly build a big streaming event around in the same way that you could with the Christmas Day game or Thanksgiving Day games. So, I wonder if they want a more meaningful slice of these full sports seasons or if they just want one-offs with specific timing.

Marcus Johnson (08:03):

Yeah, I think it's a good one. Jessica Toonkel of the Wall Street Journal was noticing Netflix is looking for a four-game NFL package. It's entering its last deal, believe it or not, of the three-year, two-game deal. So it had two games on Christmas and that was a three-year deal that they signed, but they want to renew the Christmas day games and perhaps add a Thanksgiving Eve game, and an international game, which could be in the season's opening week, could be, as Danny said, maybe the opening game with the season potentially.

(08:36):

So maybe it's event focused, maybe that's their goal. Because when you look at it still seems like they're throwing everything at the wall. Right? Because my question was, will they start to coalesce around a particular sport, a couple of sports or strategy? Because they have, as we've mentioned, WWE wrestling, NFL games, one-off boxing events, they've got MLB games.

(08:59):

Then you've got the non-sports like award shows and apparently going to maybe reboot a talent contest style search. But Isabelle Bousquette of the journal was noting since March 2023, Netflix has broadcast more than 200... So three years... Broadcast more than 200 different live events. And if someone asked me what their strategy was, I guess event-based?

Daniel Konstantinovic (09:21):

I feel like the throwing spaghetti at the wall and seeing what sticks has been the content strategy for Netflix even beyond live events. This is what they do with scripted series. People complain all the time that Netflix is canceling shows after season one or season two. This kind of feels in line with that approach to me. "If we can just come out with a lot of different live events, we have a higher chance of a hit rate than if we just focus on a few limited ones a year."

Marcus Johnson (09:54):

Yeah. Yeah. Yeah, that's a good one. So I've got one for you guys. So Netflix said it will double add revenues this year to reach $3 billion. My question is, can they? And so, our forecast crew thinks Netflix will nearly double US ad revenues this year growing close to 90% to 2.4 billion. So, they're pretty optimistic-

Ross Benes (10:19):

We also had to knock down the forecast quite a bit recently-

Marcus Johnson (10:22):

Oh, interesting.

Ross Benes (10:23):

... because we were exceeding what Netflix had reported. So last quarter, Netflix reported 1.5 billion, first time they ever shared a number, and we were higher than that in the US alone.

Marcus Johnson (10:34):

Okay.

Ross Benes (10:34):

So we had an adjustment to go down because now we finally have more information than what we had before and it was lower. So we have that outlook, but that just kind of gets us back to what we were anticipating beforehand.

Marcus Johnson (10:49):

Okay. So the total number down, the growth a bit lower than what Netflix is expecting. Do we think they can reach that? Do we think that doubling ad revenue from whatever number to whatever number, do we think close to doubling ad revenue is on the cards?

Daniel Konstantinovic (11:06):

I think it's certainly possible. I wouldn't write it off. They came out in this most recent quarter and said that they are sticking to their projection of doubling the ad revenue. So it seems like there's some confidence there. They keep making these moves to widen the gap between ad-free streaming and ad-supported streaming. So, ferrying more users to the ad-supported tier, enticing new customers to join the ad-supported tier over ad-free ones.

Marcus Johnson (11:31):

Yeah.

Daniel Konstantinovic (11:32):

So, it's-

Marcus Johnson (11:32):

The price increases are helping with that.

Daniel Konstantinovic (11:34):

Yes, for sure. Exactly. That's the main mechanism that they are using to get people to switch over, or motivate people to switch over. Who knows if it's working yet.

(11:45):

But if they are able to expand their live sports portfolio meaningfully, I could definitely see it happening. They've been opening the doors to ad channels like programmatic buying on Netflix is now a thing that wasn't there in the first couple years of its ad business being open.

(12:06):

And I'm sure that will entice a lot more advertisers to buy on Netflix since it's a mechanism that they're familiar with. I have a question about the ad revenues as well, but I'll save that for after this one, because I want to let Ross chime in.

Marcus Johnson (12:23):

Sounds good.

Ross Benes (12:24):

Well, yeah, I mean, they can hit it, but they've been below expectations basically since launch. If you were to ask people four years ago, around the time that they would've been preparing to launch an ad business, where would they expect them to be at the end of 2026, I think they'd expect a lot larger figure. A few billion dollars to Netflix is actually not that much.

(12:49):

Way, way, way below subscription revenues and below other advertising platforms on CTV, even though those products have much less overall usage. You'd see the combination of Hulu and Disney Plus with more revenue, Roku with more ad revenue, but Netflix use was the top outside of YouTube. So it is possible, but they haven't really met their advertising goals so far, so I wouldn't count on it.

Daniel Konstantinovic (13:20):

Yeah.

Ross Benes (13:21):

Oh, sorry, go ahead, Ross. Or Ross, Marcus.

Marcus Johnson (13:24):

Were you going to move on, so can I say something about this [inaudible 00:13:26]?

Daniel Konstantinovic (13:25):

No, I had a follow-up-

Marcus Johnson (13:25):

Please.

Daniel Konstantinovic (13:25):

... question-

Marcus Johnson (13:25):

Please.

Daniel Konstantinovic (13:28):

... about this. Yeah, I wonder, your point about Disney and Hulu is a really interesting one, and I wonder if you think that's a function of the existing advertising relationships that Disney had, or when Netflix came out and said it was advertising, it definitely seemed like a last minute announcement to soften the blow of its first rough quarter in many years, or ever, perhaps.

(13:55):

And there was a lot of buzz at the time of, "This is the company that drove the shift to streaming and digital, so they could make a huge splash here." But to your point, I don't think that they're growing as fast as anyone expected. It's certainly not as fast as they would've hoped. So yeah, I'm just curious about why you think that might be.

Ross Benes (14:16):

Yeah, to your point about it being rushed out, I mean, they've built so much, but yet with advertising that launched, they rely on Microsoft. But Disney Plus and before that, Hulu, they've been selling ads forever at that company. Hulu, God, I don't even know when the first Hulu ad would've launched. That's a streaming original thing.

(14:38):

Disney Plus didn't have ads at the start, but they had the whole team and infrastructure once they put the ad tier on. It's a lot simpler to get to a billion dollars for a company that has an advertising infrastructure, than one who's building it and creating it for the first time. So, that's something Disney has an advantage on them for sure, but not just Disney. I think you see the ad sales have climbed faster at several other companies than they have at Netflix, even though their streaming service may not be as popular.

(15:12):

And maybe they don't need advertising to be everything for them. They have such a healthy subscription business, but it's clearly, I don't even know if I'd say it's second fiddle. It's like a third or fourth fiddle, not an afterthought, but in terms of revenue share, quite minuscule. And it's going to be a long time before that changes in a meaningful way.

Marcus Johnson (15:36):

I'm curious, yeah, are these growing pains or is there something, I don't want to say flawed in their strategy, but maybe something that they need to change to make this become the business that they're hoping it to be? Or are they intentionally trying to roll this out slowly because adding too many ads, and in terms of ad load and bumping up the price too quickly can turn people off.

(16:03):

So, I wonder if the slow game is going to really pay off in the long term. We mentioned the price increases. Marisa Jones, who's one of our newsletter analysts, was noting that Netflix, they recently raised US subscription prices, which could nudge ad-free people to pay more towards the ad-supported alternatives, of which there are 88 million ad-supported Netflix subscribers in the US. That's about a quarter of the population. But ads now, if you want to avoid them, it's going to cost you for the standard plan about 20 bucks.

(16:35):

And if you can go down to the ad-free one, that's only nine. So it's quite a big drop, especially as things are getting more expensive and so people looking to trade down in certain places. And then Danny was saying, is it working, the mechanism to move people from one to the other? Senior analyst Gadjo Sevilla pointing out that in Q4 2025, the ads plan accounted for over 55% of new signups in markets where it was available, according to Netflix. A big reason being affordability is overtaking content as the top reason consumers are canceling.

Ross Benes (17:11):

A lot of ad users though are light users. Not this quarter, but the quarter before that, Netflix noted on the call that they make more revenue per membership on the ad-free plan. And that's going to be even more so the case if the prices on the subscriptions get jacked up.

(17:27):

You're only going to have a higher RPU on an ad plan if people are sitting there and watching the ads. But a lot of people who are like, "Well, I'm going to pay under 10 bucks for Netflix," Netflix probably isn't their priority. If it is, they're willing to pay the extra $12 or so and avoid the ads. So it's a lot of the casual users that go to the ad plan.

Marcus Johnson (17:51):

Yep. Yep. Dan, you had another question on advertising.

Daniel Konstantinovic (17:56):

Yeah, a follow-up to what we're talking about, I suppose. I have a question here. Can Netflix ever close the ad revenue gap with YouTube? Netflix is often talked about as a streaming leader, but YouTube dwarfs it in terms of ad revenues. We forecast that Netflix is going to make about 4.5 billion in US ad revenues by 2028. YouTube is going to make about four times that by the same, there in the same amount of time.

(18:25):

So I wonder if they can ever eclipse it. But to Ross's point in our last, or what we were just talking about, maybe it doesn't need to. The subscription business is very healthy and it definitely has YouTube beat there in terms of what something like YouTube TV contributes to that company versus what the ad-free Netflix subscriptions contribute to them.

Marcus Johnson (18:46):

Yeah. Yeah. Ross, any other questions?

Ross Benes (18:53):

Just one last very basic one is, what's life at Netflix like without Reed Hastings?

Marcus Johnson (19:01):

Yeah, this is a good one. Yes. Yeah. I had, "Will the company be okay after Reed Hastings?" So its co-founder, former longtime CEO, leaving the board of directors later this year. So he's already stepped down as CEO. My answer was yes, they'll be okay, because they're very well positioned to weather the transition. Two reasons I thought. One is he already stepped back from driving the car about three years ago, fully handing over the reins to co-founder at the time, the one co-founder was... Or sorry, co-CEO was Ted Sarandos.

(19:39):

So the current co-CEOs, Ted Sarandos and Greg Peters, this is the second point, have also been at the company forever. And so it's not as though there's kind of this turmoil of his exit has been hasty and that the new people, the new CEO or CEOs don't really know anything about Netflix. Sarandos has been at Netflix for 26 years, almost since day one, head of content for 20, and then co-CEO for the last six.

(20:11):

And Peters has been Netflix for 17 years, head of streaming and partnerships, head of products, COO, CPO, basically all the main roles, and now co-CEO for three years. So I'm going to say they'll be okay. Danny, what do you think?

Daniel Konstantinovic (20:27):

I agree. I do think that the Peter-Sarandos co-CEOship will have tensions that will show in some aspects of the business. Just during the Warner Brothers Discovery Paramount deal, there was some news trickling out in the press about conflict between the two CEOs, one of them being more interested in the deal than another.

(20:53):

And I suspect that you'll see more narratives like that in the coming months, years, however long it takes for the company to pick just one, which I assume they will do at some point. I can't say that I have great insight into what Sarandos' priorities are versus Peter's and how those tensions will materialize, but it seems like the stage is set for there to be further tension there. And I'm sure the two of them will be throwing their weight around to try and get the top position.

Marcus Johnson (21:30):

Why do they have two CEOs?

Ross Benes (21:34):

Paramount had three there for a little bit.

Marcus Johnson (21:38):

Oh, they did? I'm just looking up to see if [inaudible 00:21:41]-

Ross Benes (21:40):

Yeah, they called it Office of the CEO.

Marcus Johnson (21:43):

Okay. Yeah, Oracle, Comcast. There's not a ton, but it's an interesting strategy. Seems to be working so far, but yeah, as soon as two start pulling in the opposite directions, it could be quite contentious. Anything else? Danny, what else do you have for us? Any other questions?

Daniel Konstantinovic (22:01):

No, I think we kind of covered it. It seems like we all-

Marcus Johnson (22:02):

Excellent.

Daniel Konstantinovic (22:03):

... had questions about sports, which was one that I didn't name, but we were talking about it.

Marcus Johnson (22:09):

Yeah. Yeah, absolutely. So we're going to pick just three, because we've always got more than three, but we'll try to figure out the top three here. Daniel, I'll go to you first. Which one do you want to keep?

Daniel Konstantinovic (22:20):

I think we should keep the live sports plan one. I think it's a really interesting aspect of Netflix's business somewhere where there's a lot of news happening, and the strategy could develop in a number of different ways. So, I think that's one to keep an eye on.

Marcus Johnson (22:34):

Excellent. What is Netflix's live sport strategy? Ross, what do you want to keep?

Ross Benes (22:39):

What Danny said about Warner Brothers Discovery, and then what do you do with the termination fee revenue? What would be something that's related to that? Do you invest that into content because you were already planning on spending it or do you just put it in a cash reserve fund?

Marcus Johnson (22:54):

Yeah. Very nice. The retail seems one is interesting, but I don't think it's as big of a deal and it didn't seem like any of the outlets I was reading for this think it's that big of a deal either. It's only a big deal because it's happening and he's been there for 30 years. But I think Netflix saying it would double ad revenues this year could be quite interesting because if they come anywhere close to that goal, then the question becomes, "What does next year look like? Can they be close to double that?"

(23:20):

I think we're expecting the growth to drop quite a lot. I mean, still, I think high 30% growth from next year in terms of ad revenue from Netflix. And then the year after that, still I think in the low 30s. So we still think it's going to be very strong, but yeah, can they start reaching those numbers that really have investors and Wall Street interested?

(23:42):

And also can they get close to the crazy numbers that YouTube is doing? So that's our top three. What is Netflix's live sports strategy? What will it be? Number two, what Netflix needs to do, if anything, to make up for the loss of Warner Brothers Discovery? And then number three, Netflix says it will double ad revenues this year to reach $3 billion, can they?

(24:01):

There are top three questions for Netflix at the moment. Thank you so much to my guests for helping me putting them together. Thank you first to Danny.

Daniel Konstantinovic (24:07):

Yeah, of course. Always a pleasure.

Marcus Johnson (24:07):

And of course to Ross.

Ross Benes (24:09):

Thanks, Marcus.

Marcus Johnson (24:10):

Yes, indeed. And thank you to Lance. From the production crew who's helping us out with this one, thanks to everyone for listening in to Minding the Numbers eMarketer Podcast. Watch upcoming episodes of our video podcast on YouTube, Spotify, and now with video on Apple Podcasts. Tune in Wednesday when Suzy will have the April Retailer Awards for you on Re-imagining Retail.

(24:29):

From Austin, which I just realized, has pretty low rents. This is the [inaudible 00:24:36]-

Daniel Konstantinovic (24:35):

Austin? That surprises me.

Marcus Johnson (24:37):

I know. Zillow... This is from Visual Capitalist. Zillow Observed Rent Index. WalletHub, they've got a hundred cities with the highest rents in the country.

Daniel Konstantinovic (24:50):

Wonder where New York is.

Marcus Johnson (24:51):

You won't be surprised-

Daniel Konstantinovic (24:51):

Maybe I don't want-

Marcus Johnson (24:51):

... to learn-

Daniel Konstantinovic (24:51):

... to know.

Marcus Johnson (24:53):

... New York is second.

Daniel Konstantinovic (24:54):

Oh, second? That's better than I thought.

Marcus Johnson (24:55):

Yeah. Three-and-a-half.

Ross Benes (24:56):

Is that San Francisco number one?

Daniel Konstantinovic (24:59):

Yeah.

Marcus Johnson (24:59):

Uh-huh. Yeah.

Ross Benes (25:00):

That makes sense.

Marcus Johnson (25:00):

3.8 grand. New York's is 3.7. Boston's 3.5. Jersey, sixth.

Daniel Konstantinovic (25:09):

We got to get those numbers up. Greatest city in the world.

Marcus Johnson (25:12):

But yeah, Austin's 1.5. It's like-

Daniel Konstantinovic (25:16):

Not bad.

Marcus Johnson (25:16):

... I don't even know where this is on the 50th. It's way down there. 100 cities. Actually, it's got to be more like 60th. That's really low. Which makes sense because when I was there, my friends were moving into new places and the places they were moving into were giving them the first month free type of discounts. It's wild.

Daniel Konstantinovic (25:38):

I thought that went extinct after the pandemic.

Marcus Johnson (25:41):

Yeah, I know. I couldn't believe it. But this is saying Austin's more affordable than Raleigh, Phoenix, Richmond, Dallas, New Orleans, Minneapolis, Durham, Colorado Springs, blah, blah, blah.

Ross Benes (25:50):

I'm surprised it's cheaper than Minneapolis.

Daniel Konstantinovic (25:52):

Yeah.

Marcus Johnson (25:53):

Yeah.

Daniel Konstantinovic (25:53):

That is really surprising.

Marcus Johnson (25:53):

This is, like-

Daniel Konstantinovic (25:53):

I have friends who live in Minneapolis.

Marcus Johnson (25:55):

... shocking. Portland, Baltimore-

Daniel Konstantinovic (25:57):

Not a great place.

Marcus Johnson (26:07):

... Knoxville, Charlotte, Boise? Wild.