On today’s podcast episode, we discuss how ready Netflix is for a potential recession, if video podcasts and content creators fit nicely into its offering, and whether AI can help improve search for the streaming giant. Join Senior Director of Podcasts and host Marcus Johnson, Senior Analyst Ross Benes, and Vice President of Content Paul Verna. Listen everywhere and watch on YouTube and Spotify.

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Transcript

Marcus Johnson:

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Hey gang, it's Friday, May 2nd. Ross, Paul, and listeners, welcome to Behind the Numbers, an emarketer video podcast made possible by Rokt. I'm Marcus, and today we'll be discussing whether Netflix is recession-proof, the chances of video podcasts popping up on the streaming giant, and how the company is using AI to help you find something different to watch. Join me for that conversation. We have two people, let's meet them. We have our senior analyst covering digital advertising and media hanging out just north of New York City, it's Ross Benes.

Ross Benes:

Hey, Marcus.

Marcus Johnson:

Hello, fella. And even further north than that, VP of content living up in Maine, Paul Verna.

Paul Verna:

Great to be here, thanks for having me.

Marcus Johnson:

Hello, sir. Today's fact. Why is the award for the most outstanding player in college football called the Heisman Trophy? It was established in 1935 by the Downtown Athletic Club of New York City and then renamed the Heisman Trophy to honor the club's first athletic director, John Heisman, a player and successful coach of the 1890s and early 1900s. He was born in 1869 in Cleveland, Ohio. He played tackle at Brown and UPenn, and then went on to have a 36 year coaching career. And he won a lot, he won 70% of his games.

He was also one of the greatest innovators of the game. According to Britannica, he was responsible for legalizing the forward pass in 1906. So yes, American football did not always have the forward pass, it was just handoffs basically. And he originated the center snap and the hike or hep count signals shouted by the quarterback at starting play. He was also the first coach to use the double pass, interference on end runs, and the Heisman shift, a precursor to the T formation. He was also the first to use the hidden ball play that's now outlawed involving a player hiding the ball under his jersey. So he did a lot.

Paul Verna:

I feel like the forward pass is American football.

Ross Benes:

Yeah, they don't value running backs that much anymore.

Marcus Johnson:

No, without the forward pass it's literally rugby, which I guess this was born out of. But yeah, he also promoted the division of games into quarters instead of halves. So remarkable influence on the game, and that's why it's called the Heisman Trophy. Anyway, today's real topic, Netflix. So we don't know how many new users Netflix added, because like Facebook, the company decided to stop reporting those figures, instead, it wants to favor other metrics, like time spent and financial targets like revenue and operating margin. But the video streaming giants did tell us that they grew Q1 revenue 13% year on year, a touchdown from last Q1, but still decent.

John Coblin of the New York Times writes that many media companies that rely heavily on ad revenue are preparing for a difficult year as marketers begin to pull back on spending amid uncertainty around tariffs. But some analysts believe Netflix is something close to recession-proof and should be able to weather any economic tumult which was reflected in them not making any changes to its 2025 outlook. Ross, I'll start with you. How recession-proof is Netflix out of 10?

Ross Benes:

I'll give it an eight. So they still have some exposure if a recession got prolonged or was quite severe, people may cancel their accounts or downgrade their tiers, but for now, I believe most people will continue subscribing Netflix. They're going to be probably stuck at home and spending less on entertainment outside the home because that's more expensive. And they don't rely on ad revenue as much as many other streaming services, they're more on subscription. The ad revenue is going to fluctuate sooner. It's already happening, you saw it in Comcast's earnings this week.

Marcus Johnson:

Yeah, Rosenblatt analyst, Barton Crockett, agrees with you, saying if a recession hits we expect Netflix subscribers to be sticky, since it's a stay-at-home, cheap diversion of the type that has held up in past recessions. Paul, what do you think? The stock market seems to suggest that it is recession-proof. Netflix stock is up over 20% year to date basically since the new government took office. You compare that to big tech and media stocks, Snaps down 25%, Disney's down 20%. Amazon, Google both down around 15, Meta around 10. So how recession-proof do you think Netflix is out of 10?

Paul Verna:

I gave it a seven. It's a lot more recession resistant than many of the companies you mentioned for a lot of reasons. First, there really is no significant tariff on digital goods. There are some regulations in some countries that amount to what would seem like a tariff, but I don't think the impact is going to be that big on Netflix. I think the reason I went for a seven as opposed to an eight or a nine is that we are in a very uncertain time and we will be for quite a while, to Ross's point, Netflix business is still more about subscriptions than advertising, but there I think even though yes, it is a cheap form of entertainment, and I think Netflix is frankly going to be the last service left standing if it comes to that, but I also think that they have raised their prices.

They're approaching a ceiling in the US where their monetization is the highest. So I don't think that people are going to be automatically just saying, "Okay, yeah, we're going to keep doing this." They might be more selective about when they subscribe to Netflix, so there might be some more churn that way.

Marcus Johnson:

I guess one of the benefits for Netflix is that people could just trade down. If you've got the standard plan, the 15,16 buck one, you could go down to the seven, eight and the consumers being helped by saving seven, $8 there. But also the company, Netflix, makes more money on those people anyway because they're more valuable because of the ad dollars that come in as a result of it, because that lower tier price includes with ads. Catherine Babb of Courts was pointing out Netflix still projecting near 30% margins, so they really don't think they're going to be affected by this as much as some other folks. That's a level of profitability which is just shocking. It's kind of in line with Apple and Google, Disney's entertainment division for context posted an operating margin just above 11% and Warner Brothers, Discovery, and Paramount Global are barely profitable on the content side. So 30% margins are unheard of.

They're not posting how many people they've added, how many subscribers they've added quarter on quarter, but the goal is to still continue to add subscribers. Last time they did report Netflix had just over 300 million subscribers end of last year. They want to hit over 400 million. So from 300 to 400 million in the next five years by 2030, can Netflix pull reach over 400 million subscribers by 2030?

Paul Verna:

I think they can. It's an aggressive goal but not unattainable given the choice that subscribers have to subscribe to different tiers, and given that in some of the countries where it doesn't quite have a lot of critical mass, there's a lot of opportunity. Plenty of countries in Asia Pacific, notably India. Even I think in Brazil where Netflix has a very large subscriber base, there's still quite a bit of opportunity for growth.

A lot of it is going to come down to whether they can license more sports content that's going to drive wholesale increases in subscribers and some of it may come down to what happens with the competition, especially considering how fragile some of its competitors are, so that could eventually pull more subscribers to Netflix.

Marcus Johnson:

Ross, what do you think?

Ross Benes:

I don't expect them to hit that metric because they're not reporting quarterly subscribers anymore, that gave me a sign that subscriber growth is slowing substantially and they don't feel like they have as much room to add. So they got ahead of that story and stopped reporting before they would start reporting flat numbers. So if they were on track to hit a goal that aggressive, I don't think they would've stopped the quarterly subscriber reporting.

Marcus Johnson:

What's quite concerning is two things, two things I think point to why they probably won't. One is research firm Antenna estimating Netflix lost US subscribers in Q1, they'd added 2.5 million the previous one, so losing any is not good. And then two, it took them four years to go from 200 million to 300 million, from the end of 2020 to 2024. 15 million of those were in the US, which means overwhelming majority to what Paul's saying were international. So if they're going to grow, they're going to grow there. But if it took them four years to go from two to 300, there's betting to go from three to four where obviously it gets harder as the law of large numbers. I can't see them hitting that, maybe 350, 360, but 400 seems like a lot. Unless Paul, to your point, they hit on a big sports package.

Paul Verna:

Yeah, like cricket in India or something like that could tip the scales.

Marcus Johnson:

Oh, interesting.

Yeah, because I was going to say there aren't many left, F1, but that's not going to do it. So one thing Netflix is working on to try to pull in more users or keep users around is maybe podcasts and also attracting content creators from places like YouTube, podcasters and creators could find a new home on Netflix. Caitlin Huston of the Hollywood Reporter was saying co-CEO of Netflix, Ted Sarandos, was saying, "The question that's out there regarding content is is it premium? Some of it is, and we believe we have the best monetization model on the planet for premium storytelling. I think we could help those creators reach an audience and could help de-risk them, unlike the kind of typical UGC, user-generated content models."

Ross, do video podcasts and content creators fit nicely into Netflix's offering in your opinion?

Ross Benes:

Yeah, it's a new place for them to draw content producers and I think it'll be pretty seamless. You already see some of that with the Miss Rachel stuff that's on Netflix where it's just the repurposing of content that already exists elsewhere, particularly on YouTube. You're also seeing creators have success otherwhere like a Mr. B show on Amazon. So I don't think there'll be a strong division in the future between social media creators versus Hollywood producers and actors. There'll be a molding where the line becomes less clear, and I would say that type of content producer will become valuable to Netflix, especially for very young viewers.

Marcus Johnson:

My push back against the argument for would be it's difficult to get people to think about you in a different light. Like Spotify has tried to say that they're the place for eBooks, for audio books. I don't think of them as that. We are trying to be the audio app, but I think of them as the place for music. And I wonder if Netflix can rebrand themselves to make people think, oh, podcasts, yes. Or content creators even, yes, Netflix is going to be the place for that.

Ross Benes:

Oh, they also want to have some quality control too. YouTube is just the fire hose, anything is on YouTube. You don't have to get that approved by anyone. You can make a video and it's up there within minutes. And Netflix is still going to have precision and choose selectively which creators it brings on, so it's not going to be quite like a YouTube or TikTok.

Marcus Johnson:

Yeah, that's a good point. Paul, what do you think? Do they fit?

Paul Verna:

I do, I do. And I think the analogous example would be Spotify. I agree that YouTube and TikTok are inherently different. I don't think that is what Netflix is going for. But if you see the kinds of celebrity deals that Spotify signed, Joe Rogan being the most prominent.

Marcus Johnson:

Good point.

Paul Verna:

And if you look at how celebrity podcasts or celebrity creator podcasts are now increasingly video focused, Netflix seems like a good venue for that. I do agree, Marcus, that making that brand flip or changing the perception is a very tall order, but I think Netflix has the capacity and the resources. And even if you look at the more traditional celebrity deals they've done with the likes of Shonda Rhimes or the Obama's or Ryan Reynolds, you could easily spin off some podcasts from that, some video podcasts that would instantly I think draw a lot of attention. So I think if Netflix decides to go in this direction, I think I would be pretty optimistic about it.

Marcus Johnson:

Lucia Moses of Business Insider, our sister company, was arguing both sides of the coin, saying that on the optimistic side, some creators are eager for the prestige, upfront money, and the ability to reach new viewers that Netflix and other Hollywood players can afford. However, on the more pessimistic side she says, "But for others, especially well-established creators, the advantage is less clear when they've built multi-platform businesses independently and enjoy control over their productions as well as direct relationships with their audiences."

So yeah, I can see both sides of it here. Lots of content on Netflix, already trying to put more on as we've been talking about, but it doesn't really matter if you can't find anything. And so Ivan Mehta of TechCrunch writing that Netflix is building a new AI-infused interactive search experience aimed at improving discovery, which I'm sure a lot of people can relate to, going to watch anything really on any platform sitting down, just searching forever, and either deciding, "Now I don't have time anymore because I've been doing this for 45 minutes," or just falling back on the tried and true.

Our Grace Harman explaining that the OpenAI powered feature lets users look for shows based on highly specific terms, including a viewer's current mood, life stage, or interests instead of just title genre or actors according to Bloomberg. Paul, can AI fix Netflix's search problem?

Paul Verna:

It can, it really all depends on how it's deployed. And I don't know that I would totally agree with the premise that Netflix has a search problem per se. Their UI has been copied by many other streaming services and even other companies that aren't streaming services. So they've done something right. Their business has also depended on its own search and its own algorithms. So clearly there's something there, but to borrow a word that Ross used to describe YouTube, it is a bit of a fire hose at this point where there is so much content. There are times when I sit down to watch something and I think I'll just flip through Netflix, and I just get decision paralysis. And I've spent 45 minutes just trying to figure out what to watch, and by then the moment has passed and I end up watching nothing.

Marcus Johnson:

You are not alone. There's some Nielsen research. 20% of consumers will turn off the TV and do something else if they can't find a title they're interested in.

Paul Verna:

Yeah, guilty as charged.

Ross Benes:

I keep a notes app on my phone, like a document of things across various streaming services that I want to watch when I have time. So when I finally sit down, I'm like, "Oh yeah, the Celtics documentary on Max. Okay, that's next.

Marcus Johnson:

Skip that. But the algorithm is everything, and 45% of Gen Zers frequently decide what they want to watch based on the algorithm or a for you page, a [inaudible 00:17:30] survey, versus 30% who rely on recommendations from friends. But yeah, trying to keep track of that can be difficult. I also do the notes app thing.

Paul Verna:

Yeah, me too.

Marcus Johnson:

They're also working on discovery in other ways as well, a new homepage design on its TV apps to try and help you find things better. Ross, do you think AI can fix Netflix's search problem?

Ross Benes:

I don't, because when AI has been jammed into other search products, it can make them worse. So Google, the UX on Google is bad right now. It's worse since they started putting AI in it. I would say the same with Microsoft. Just a tiny, tiny example. I asked Google a few weeks ago, what day is WrestleMania this year? And it gave me the wrong date, and it said it was powered by AI. This is the most simple query that it would've gotten correct before. So AI just presents some unfactual information more often that I just feel like there could be more bugs introducing it. AI does a lot of things great, search is still being figured out for sure.

Paul Verna:

Yeah, I totally agree with the accuracy part, but I also think that AI systems will get a lot better at that in not a long time. So when we think about can Netflix do this, I'm thinking a little bit more like in the long term, not like in the next three to six months, but maybe in the next year, two, three years. And I think the technology will come a long way. I've already started seeing some improvements in the accuracy of results. It's totally anecdotal. I don't know that it can be proven out, but I think as the technology improves, Netflix will obviously be able to harness that.

Marcus Johnson:

I also don't think you need AI to do some of these things that they're suggesting, because it says that they're going to recommend shows based on specific terms, including a viewer's mood, life stage, and interests. You could just have a couple of questions when you open the app, or you could have categories that group things by mood, life stage, or interests without AI. But I do think these are good ways, because sometimes you'll sit down and you do think, I feel a certain way or certain shows resonate because you are a certain life stage. And so I think getting away from just title genre and actors is a positive, whether AI is involved or not.

Paul Verna:

If I'm asked about my mood when I power up an app, it's instantly going to put me in a very, very foul mood.

Marcus Johnson:

Sorry, Ross. [inaudible 00:20:15].

Ross Benes:

There's only so much space on the screen and Netflix or Prime Video have so many titles, that no matter what technology you use, I don't know if there's a good way to surface all that and bring it right in front of the viewer's eyes. I feel like people are always going to have to dig a little bit if they want to watch something that isn't just the newest thing that they've put out or the most recent thing, or the thing that correlates the best with your existing watch list.

Marcus Johnson:

I wonder the key here is, and maybe, I don't know if they do this, I don't think I watched enough streaming service to know, but some way that you can have people after they've watched something that instantly share it with you to be like, "Oh, I think you'd like..." So you had a pool of films where I've got my, whether it's contacts on the phone or a certain subset of it, if my mom is sending me a recommendation and my best mate also just saw something. The number of times people recommend things, then you forget what they've said, which is why Ross has the notes app, I imagine. So maybe that's a way [inaudible 00:21:20].

Ross Benes:

Which is barely more sophisticated than having a piece of paper with [inaudible 00:21:22].

Paul Verna:

But I think they would have to build a lot of social functionality into it, and I don't know if they have the appetite for that.

Marcus Johnson:

Yeah, and it's the TV, isn't it, most people are watching on the TV anyway, so it makes it a lot harder. All right, gents, this ends by talking about how much money Netflix is making from advertising and how much it wants to make. David Bloom of Forbes noting that Netflix is targeting $9 billion in worldwide ad revenue by 2030, so five years out. Our forecasting team estimates that US ad revenues for the streaming giant will top 2 billion this year. So Netflix targeting nine in 2030, that's worldwide. Our forecast team says in US, they have 2 billion this year. Ross, do you think reaching 9 billion in ad revenue is achievable by 2030?

Ross Benes:

It is achievable, because Netflix still has a lot of room to expand internationally. They also have a lot of room to expand in the US still, most viewers are not on an ad supported plan, but they're just getting their ad business stood up. They're just starting to really have their own tech and tools, and diversify away from the initial deal that they did with Microsoft. So they're really building out the ad business. There's a lot of regions where they can reach more viewers than what they currently have now. But I also think another big reason why that 9 billion figure is obtainable is we're talking about $9 billion in today's terms. I think we're going to have pretty significant inflation, and by 2030, $9 billion won't be as much as it sounds like it is right now.

Marcus Johnson:

Is it moving fast enough though, Ross? Because Dan Gallagher of the Wall Street Journal says Netflix is building its ad business, but it's been surprisingly slow going given its large subscriber base. Analysts estimate Netflix generated a little over the 2 billion in ad- supported revenue last year, similar to our figures, about 5% of the company's total revenue, according to Visible Alpha estimates. Are you expecting this to have gone a bit faster?

Ross Benes:

I would've expected it to have gone a bit faster, but that doesn't mean that the potential in five years time isn't still there.

Marcus Johnson:

And I guess it does, it's good maybe to a certain extent because this does insulate them from a slowdown in ad growth. Ad revenues only a tiny slice of what Netflix makes in dollars. Paul, can they reach 9 billion by 2030?

Paul Verna:

I'm a bit skeptical on this one. To bring it back to John Heisman, I think this is not just a forward pass, but a Hail Mary. Maybe they can get relatively close to that, but it seems that first, yes, the ramp up has been rather slow, although I think it will accelerate when Netflix builds its own ad tech stack.

Marcus Johnson:

Right, switching over from Microsoft.

Paul Verna:

Yeah, and I think Netflix has learned a lot, and they said all along that it was going to be slow, and I think it's credit to doing it right as opposed to doing it fast. Right now they have ad tiers in something like a dozen territories, and they are the ones that I think probably offer the best monetization opportunities. I think when you look at a country like India, I can more easily foresee a big burst of new subscribers than a big increase in ad revenue. So yeah, if I had to handicap it, I'd say probably maybe they get to eight, but not nine.

Marcus Johnson:

One of the positives here is, so in terms of ad-supported signups, 43% of US customer signups in February were for the ad-supported tier, that's up from 40% in January. So from 40 to 43 in just a month, according to Antenna. And that's in US, the US obviously where they make more money or average revenue per user. But still, yeah, it does seem like it's a little bit more slow going than perhaps you would've expected given the huge subscriber base. That's all we've got time for this episode. Thank you so much to my guests. Thank you first to Ross.

Ross Benes:

Thanks, Marcus.

Marcus Johnson:

And to Paul.

Paul Verna:

Thanks for having me as always.

Marcus Johnson:

Indeed, indeed. And thanks to the whole editing crew, Victoria, John, Lance, and Danny. Stuart runs the team and Sophie does our social media. Thanks to everyone for listening in to Behind the Numbers, an emarketer video podcast made possible by Rokt. Please leave us a quick review if you can, it's the currency that keeps this podcast going. We'll be back Monday talking about Google's recent performance, happiest of weekends.