Back in our Oct. 21, 2022 podcast, “Netflix is Poised for 2023 Revenue Growth,” Colin and I articulated all the reasons we were optimistic about Netflix’s upside in the new year. Primarily we were focused on its newly launched $7/month “Basic with ads” tier and its plans to eliminate password sharing throughout the world.

Flash forward 7 months, and Netflix provided its first tangible results and commentary from the initiatives, as well as optimistic signs of where things go from here. In today’s podcast, Colin and I dig into these signs, including most prominently Netflix’s disclosure that $7/month "Basic with ads" subscribers already produce a higher average monthly revenue than do its $15.50/month "Standard" plan (ad-free) subscribers. Some basic math reveals that "Basic with ads" subscribers drive at least $8.50/month in ad revenue for Netflix, which in turn means that aproximately 55% ($8.50 / $15.50) of "Basic with ads" subscribers’ total revenue is already derived from ads, not subscriber payments.

That Netflix accomplished all of this despite 1) it still being very early days for the ad offering, 2) a massive headwind in the ad business due to recession/etc. worries, 3) all of its ad revenue being “linear TV replacement” or upper-funnel reach and frequency inventory, with nothing yet from more valuable full/lower funnel offerings, suggests the ad business is already a big win for Netflix and has huge potential.

(At this point I can’t resist noting that I have been badgering Netflix for years to launch a lower-priced ad-supported tier because of the upside…see “Why Netflix Will Launch an Ad-Supported Tier in 2020” from Dec. ’19, “6 Reasons Why Netflix Should Launch an Ad-Supported Tier Now” from Mar. ’20, and “Revisiting Why Netflix Should Launch an Ad-Supported Tier” from Mar. ’21 for a sample of my haranguing. So, in the category of “better late than never,” hallelujah, Netflix finally, finally put aside its religious objections to advertising and saw the light.)

Importantly, Netflix notched up its operating income target to 18%-20%, and on the earnings call, CFO Spence Neumann said he expects that over time advertising would be a “meaningfully over 50%” margin business.

So in short, Netflix is reigniting revenue growth, and that new revenue is going to be super high-margin. All the company needs to do is execute (just that!). Listeners and VideoNuze readers know I’m generally pretty cautious…but Netflix’s story looks quite compelling to me.

Note, preceding the Netflix segment, we discuss an article in The Athletic with MLB Commissioner Rob Manfred elaborating on this desire for a 30-team, in and out of market streaming service. While that’s probably a pipe dream, more salient for ITS listeners are his highly candid comments about the correlation between league revenue and player salaries.

With cord-cutting, the downward slide by RSNs and national TV sports networks and streaming entertainment options proliferating, I continue to believe that if I were an agent for a superstar athlete these days, I’d be angling for relatively mid-term contracts with maximum annual dollar payouts. I hate to admit it, but maybe those LIV golfers are onto something…

We are all witnessing key leg of the sports business model being kicked out, in real time. Despite the Commissioner’s aspiration to replicate the artificial economics of the cable bundle, which egregiously charged an annual multibillion-dollar sports tax on non-fans for expensive channels they never watched, eventually reality will set in, because, where the Internet is concerned, that’s inevitable. And as it does, it will ripple through every aspect of the sports ecosystem.

Listen to the podcast to learn more (36 minutes, 34 seconds)

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