Ad Tier, Password-Sharing Solution Potential Positives for Netflix: Cowen

Cowen expects Netflix to report 1 million paid net subscriber additions, in line with company guidance, when it reports Q3 earnings Oct. 18, analyst John Blackledge wrote investors Wednesday. Guidance reflects macroeconomic and near-term challenges, said the analyst, saying investors are “looking ahead to the ad tier rollout” and password-sharing solution, which could be implemented as early as November.

The upcoming ad-tier rollout and paid sharing initiatives could partially offset any weakness in Q3 member net additions or Q4 net add guidance, Blackledge said. The ad tier could also lead to “new disclosure granularity” on advertising VOD subscriptions and paid sharer counts, he said. Cowen believes Netflix will generate $2.4 billion in U.S. and Canadian ad revenue, in addition to subscription fees next year, via a mix of existing members switching to the ad-supported tier plus a potential 4 million incremental member additions.

Netflix shares are down 60% year to date vs. 2021 but up 19% since the company reported Q2 earnings in July, Blackledge noted. The year-to-date decline likely reflects a trend among tech sector shares and Netflix-specific challenges, including high existing penetration in some markets, password sharing, increased competition and macroeconomic issues, he said. He maintained an "outperform" rating on the stock.

A September Cowen survey of 2,500 Netflix users, who live in a different household from the Netflix subscriber, said about 51% would pay an additional $3 to maintain access to the service. That underscores the opportunity of a paid-sharing solution, Blackledge said. About 26% said they would end access to the streaming service, and 22% were unsure. Netflix remains the most popular living room TV streaming option, the survey said, “while TikTok gains mobile share."

TikTok is gaining in reach and taking time share in several areas. Lightshed Management blogged last week that media companies should be “afraid, very afraid” of TikTok’s “growing cannibalization of Instagram, YouTube, Facebook and Snapchat time spent.”

What isn’t being talked about enough “is how TikTok is devouring overall time spent per day,” Lightshed said, recalling Netflix CEO Reed Hastings' comments in January 2019 on how much Fortnite was capturing in time spent per user per day. Referencing a Barstool Sports podcast, Lightshed said, “You cannot help but worry that TikTok is eating into time spent watching all forms of video,” including mobile video, linear TV or streaming TV.

TikTok’s reach is expanding beyond a young teen user base to young- and middle-aged adults, Lightshed said. “We overhear at every cocktail party we go to that someone and/or their partner/spouse is addicted to TikTok,” said the analysts: “TikTok is the ultimate cure for boredom. Sorry TV.”