Recently, we had the opportunity to listen to a very insightful conversation between Morgan Stanley analyst Benjamin Swinburne and Spencer Neumann, CFO of Netflix ($NFLX (-1,07%) ), listened in.
Right at the beginning, Swinburne talked about Netflix's impressive development. He recalled that the company's growth in 2023 was still in the mid-single digits and the mood was rather depressed. But in 2024, Netflix reported top-line growth of almost 20% in the fourth quarter and a margin increase of six percentage points. Swinburne therefore wanted to know what made this rapid reacceleration of the business of this magnitude possible.
Neumann mentioned that the company had focused on two key tactical measures during the slowdown in growth. Firstly, introducing a solution to account sharing, as there was significant demand but many users were watching Netflix for free. Secondly, building an additional revenue and profit pool through advertising. In the area of paid sharing, the solution has been introduced over the last two years, rolled out globally and finally fully operationalized, as communicated in the last earnings calls. This has led to a better mechanism for capturing the value of the growing entertainment offering and meeting demand.
With regard to advertising, Neumann emphasized that this area is still in the early stages of development, but that significant progress has already been made, particularly in terms of scaling reach. He mentioned that Netflix expects to reach critical mass in ad-supported memberships in all twelve advertising markets in 2025 and will then focus on further improving the monetization of inventory. In addition, Neumann emphasized the continuous improvement of the entire Netflix service as a decisive factor, as the competition is also getting better and better. The goal is to improve faster than the competition in order to drive the growth cycle of more and better entertainment, higher engagement, more revenue and more profit.
Swinburne followed up and addressed Netflix's ambitions to achieve sustained double-digit revenue growth. He asked about the remaining addressable market, with over 300 million members already and revenues of 40 billion dollars last year. Neumann reiterated that Netflix was still at the beginning. Although progress has been made, the addressable market is still enormous. Despite its large current reach, with over 300 million paying members worldwide, it reaches an audience of over 700 million people in households. Nevertheless, the key figures of the addressable market are still small. Netflix reaches around 40% of networked TV households worldwide, and this universe continues to grow. It captures around 6% of the addressable revenue market and has less than 10% of TV view share in every major country. The strategy is simple: offer more and more entertainment value worldwide, expand the offering beyond movies and TV to games and then achieve healthy revenue and profit growth through a better value creation mechanism (more members, further development of prices and plans, advertising), while costs should grow more slowly than revenue.
Regarding competition, Swinburne asked specifically about YouTube. Neumann confirmed that there is competition for people's entertainment time, but emphasized that the focus is on growing into the entertainment time that neither Netflix nor YouTube currently cover. In the USA, for example, around 80% of TV view shares are not covered by either of the two. He highlighted Netflix's strengths: a leading position in direct-to-consumer entertainment with an enormous global reach, an outstanding discovery and product experience for premium video content, sharing the creative and commercial risk with creators and a leading ability to monetize engagement per hour, which in turn enables the funding of creators' future projects. This leads to Netflix being perceived as a home for the best stories and creators.
Swinburne steered the conversation to content spend and investment. He noted that revenue growth over the last five years has been in the low to mid double digits, while cash content spend has only increased by about 3%, indicating that the content team is realizing a higher return on investment. Neumann credited the team for delivering more entertainment value per dollar. He explained that this is based on a continuous learning process on how to leverage content budgets for the greatest impact, across a wide variety and quality of content. The combination of this learning and the improved ability to capture demand through paid sharing, advertising and optimized pricing leads to a higher return on investment.
When asked where the incremental dollar is going these days, Neumann replied that growth opportunities are seen everywhere. It's less about "growth" versus "maintenance" mode, he said, and more about where the highest growth opportunities and spending opportunities exist. He cited examples such as the return of major English-language series, the expansion of licensed content, growth in live events (just starting to take off in the US) and the continued strong investment in non-English language content.
Swinburne addressed the content budget of around 18 billion dollars for the current year and asked about the budgeting and investment process. Neumann explained that this is a mixture of art and science. You start with a good predictability of revenue and set margin targets. This is used to determine how much is left over for content, whereby long-term investments to promote growth are also taken into account. Then there is the bottom-up approach, in which the various content categories and regions are analyzed in order to achieve the greatest impact. This process is fluid and iterative.
Another important topic was sport. Neumann clarified that Netflix is pursuing a "live event strategy" and not a pure "sports strategy". Live events are a broader category that aims to offer members more entertainment value and create cultural conversation starters. This includes comedy, unscripted, sport and sports entertainment. This has already been seen with the Tom Brady Roast, John Mulaney, the Paul Tyson fight, NFL at Christmas and now WWE. Such big, event-like moments would support Netflix's core objectives: Entertainment Value, Acquisition and Retention. Although live content currently accounted for a small proportion of spend and viewing hours, it would have a big impact if implemented correctly. Regular seasons of major sports would not necessarily make sense from an economic perspective and to increase entertainment value.
A major focus was on the topic of advertising. Neumann explained that Netflix is moving from the "crawl" to the "walk" phase this year. Great progress had been made and the company was very satisfied with the development of its advertising business. The first step was to scale its reach and the advertising subscription model was seen to be working, with around 55% of new sign-ups in the fourth quarter coming from this subscription, leading to significant sequential growth. The focus for 2025 is now increasingly on monetizing this reach, as it has not yet kept pace with the scaling.
Regarding the long-term ambitions in the advertising business, Neumann explained that the goal is to become the gold standard for digital and branded TV advertising in a premium video marketplace. Given the high engagement rates in the advertising subscription model and the creation of advertising opportunities in live content, this is a large additional revenue and profit pool. The addressable market in the current advertising countries is around 180 billion dollars. Advertising helps to maintain an accessible price level for members and could become an important third pillar for revenue and profit growth alongside membership growth and price development. Even though Netflix will remain a primarily subscription-based business for the foreseeable future, advertising could become a significant minority share of revenue in the medium term.
Swinburne asked about the status of paid sharing. Neumann explained that it had been "operationalized" and, like everything else, was being continuously optimized. Similar to the optimization of the sign-up flow over the course of a decade, there is still potential for optimization in paid sharing in the coming years.
Another important topic was artificial intelligence. Neumann emphasized that Netflix has been working with AI and ML for over 15 years and is now increasingly using Gen AI to achieve efficiency gains and improvements in all areas of the company. This ranges from enterprise productivity in support functions such as finance and legal to improving the member experience (product and title discovery, creation of promotional materials, conversational search) and providing tools for creators to support their creative work. The focus is on using AI to ultimately improve every aspect of the Netflix service and increase entertainment value for users worldwide.
Finally, the conversation turned to gaming. Neumann emphasized that Netflix is still at a very early stage here and that this is a decade-long build-up. They have already published over 100 games, but are not yet where they want to be. The core strategy remains to offer great games within the Netflix membership to increase member value and engagement. The focus has been sharpened with the new executive Alan on some key areas: narrative games, party games for TV, commercial games and children's games. The first signs of higher retention and even acquisition of users who play games can be seen. In the future, they want to go beyond mobile and test cloud gaming on the TV.
The conversation gave a very positive impression of the current situation and Netflix's plans for the future. The strategic decisions of recent years, in particular the measures against account sharing and the expansion of the advertising business, appear to be bearing fruit and have led to growth.
The focus on global content and investment in non-English language productions is paying off and reflects the company's global reach. The cautious approach to the sports market with an emphasis on "eventized" live moments seems economically sensible. The long-term ambitions in the gaming sector are ambitious, but the early success with IP-based games indicates potential.
Overall, Netflix presented itself as a company with clear strategic priorities and a strong focus on long-term growth in an ever-changing competitive environment.
