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Marcus Johnson (00:00):

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(00:30):

Hey gang, it's Monday, February 2nd. Ross and listeners, welcome to Behind the Numbers, an EMARKETER video podcast made possible by Seedtag. I'm Marcus. And joining me for today's conversation, we have one chap, senior advertising and media analyst, Ross Benes, living in New York state. Welcome to the show.

Ross Benes (00:47):

Hey, Marcus. Good to be here.

Marcus Johnson (00:49):

Hey, fella. Thank you for your time. We start, of course, with the fact of the day. So Ross, today, I'm talking about the red advantage. What does that mean? In 2005, Russell Hill and Robert Barton of the University of Durham, so 20 years ago in the UK, found that wearing the color red made you more likely to win in sports with 56% of victories, so not by a massive amount, but statistically they did a study on it and found numerous times, people who were all red, won 56% of the time against closely matched competitors versus the athlete... Yeah, one athlete in red, one in whatever other color, blue, whatever. The one in red one more often than not. Tim Radford of the Guardian explains that redness indicates anger, testosterone, and aggression in humans, that red plays a big role in signaling superiority throughout the animal world.

(01:45):

However, more recent data up to 2020 shows that the red advantage has disappeared. Researchers suggest that rule changes and technology which eliminate referee bias could be behind it. And so Ross, I thought this could help explain Nebraska football's recent struggles who were red. Used to be good, less so now.

Ross Benes (02:07):

That's probably what changed the data, going from winning 90% of your games to 45, skewed the whole database against red. That's as good of that explanation as I've got.

Marcus Johnson (02:23):

Sorry, Cornhuskers. There's always next season.

Ross Benes (02:25):

And the basketball team is top five right now.

Marcus Johnson (02:28):

Hello. They wear red or is it wearing white?

Ross Benes (02:32):

Yeah, of course.

Marcus Johnson (02:32):

Okay.

Ross Benes (02:32):

Well, they wear wide at home because it's not the NBA and there's actually consistency in uniforms. They wear wide at home and red on the road.

Marcus Johnson (02:41):

All right then. At least you've got one program. And volleyball. You also good at volleyball?

Ross Benes (02:46):

Oh yeah, yeah.

Marcus Johnson (02:48):

Yeah. And volleyball too. I know Nebraska.

Ross Benes (02:50):

They lost in the elite eight this year, but they were undefeated until then. Number one all year.

Marcus Johnson (02:54):

But historically good, okay. All right. Very nice. Well, today's real topic is the three big questions surrounding Netflix at the moment.

(03:07):

All right, let's set the table first. So for year 2025, Netflix said that it had over 325 million subscribers worldwide. That's up from 301 a year prior, so an 8% uptick. Total 2025 revenue reached 45 billion, that's up 16% year over year. That's the same as 2024's full year revenue growth. So subscribers did well, revenue did very well. Q4 though, zooming in, total revenue grew 19% in Q4 to cross the 12 billion mark. That's its fastest growing quarter, Ross, in four and a half years, so not bad. Net income was up to and a half billion, it's nearly 30% increase.

(03:43):

So they're the numbers, but we wanted to talk about the stories, what's going on, the big three questions surrounding Netflix. And so let's go throw a bunch of ideas into the middle, into the ring, and then figure out what we think is the top three big concerns or things that Netflix should be is thinking about.

(03:59):

The first one, Ross, I have is, will Netflix actually be able to buy Warner Brothers Discovery? Todd Spangler of Variety explained that Netflix recently announced it will sweeten its 83 billion deal to buy Warner Brothers Discovery Studios and HBO Max streaming business by switching to an all cash offer, replacing its previous cash and stock agreement. The change was driven by pressure from Paramount Skydance, which has been pursuing a hostile takeover attempt of WBD with what it alleges is a superior deal for WBD shareholders. What do you think of this one being one of the biggest things Netflix is thinking about?

Ross Benes (04:33):

Well, it's definitely one of the biggest things. Their stock has taken a hit since they've agreed to terms. Investors clearly aren't enamored with WBD as much as Netflix executives are right now. With the Warner Brothers thing, what I find interesting is Netflix and Paramount keep going back and forth, and no one is actually raising their price really or raising their bid. So Paramount's doing all these things to try to stop Netflix, but they haven't increased their offer. So at this point, I think the only things that could stop Netflix is if a regulatory body squashes the deal or if Paramount decides to, okay, we're going to focus less on lawsuits and more on raising our bid because that would sway shareholders more than the tactics they've used so far.

Marcus Johnson (05:28):

Yeah. One of our colleagues, Paul Verna was of the opinion that Warner Brothers Discovery acquisition by Netflix won't be settled before the end of 2026, in large part because as you mentioned of the regulatory hurdles. There was a journal article noting that President Trump and his advisors, including White House officials, were concerned about the deal. So that could trip it up. But then also, yeah, this idea that Paramount might, and The Economist thinks is likely to improve its own bid, currently offering $30 a share for all of Warner, whereas Netflix is offering, call it $28 a share, a little bit less, for just its streaming platform and studios, allowing Warner shareholders to hang onto the firm's TV and cable networks. If they do raise the stakes though, Ross, this piece from The Economist noting Netflix then faces a dilemma. Does it increase its bid? Because its all cash switch signals its seriousness about acquiring Warner, but unlike Paramount, which can draw on the Ellison's family fortune in Oracle tech stocks, Netflix has its own shareholders to worry about. And as you mentioned, many of them are not convinced by this project. Netflix's market value has fallen by nearly a third since it began circling the company in October.

Ross Benes (06:36):

Warner Brothers Discovery has been a company of declining value for some time. So it's interesting to have two large media companies bidding against each other this way and bidding in a way that aggressively exceeds what the market cap would suggest the price should be for that, which belays they believe there's probably more value in the sum of that company plus their service than there is in just the parts of it alone.

Marcus Johnson (07:10):

Yeah. It'll be interesting to see if they do make a higher bid for it because Netflix, the piece was noting, has a history of walking away when the content prices get too high. Last year, they allowed the Ellisons, as they call them, Paramount to outbid it, offering $8 billion for the seven year UFC rights. So maybe there is a price that's too high for Netflix, but for now, Paramount hasn't made it.

Ross Benes (07:34):

Well, there's also another value in taking Warner Brothers Discovery aside from just having the library and being able to monetize it yourself, you're removing a competitor and absorbing it. And that's the case, whether it's Paramount or a Netflix. Netflix is obviously a competitor on the streaming front, but Paramount's looking to take the whole entity. And on the TV network side, Paramount and Warner are two of the top cable TV companies in the US, even worldwide really. So there is a strategic advantage of you're going to cut the competition and you're going to be the one who takes it in.

Marcus Johnson (08:16):

Yeah, we'll see. This was already going to be a long process. David Hayes of Deadline was noting that many investors were uneasy about the 12 to 18 month process in trying to close this acquisition. And Marisa Jones, our Marisa Jones was writing that the all cash offer, Ross, definitely helps because it could shorten the deal's lengthy timeline by several months, offering a bit more clarity about what is going to be happening with all of these players. The shareholder vote is expected in April, so we'll see. So yeah, I think this has to be, for me, probably top of the list, even though we'll be watching this closely, I'm sure, at least till the end of this year. What else do you think Netflix is playing close attention to at the moment?

Ross Benes (08:53):

Well, ad revenue would be something I'd point out. They shared for the first time that they made 1.5 billion in 2025. They have alluded to number of ad supported viewers in the past or percentage growth year over year or upfront volume, but they've never given a specific dollar amount like they did in this release. And what stood out to me is it's quite low. They're clearly waiting to hit a threshold before they announce 1.5 is a nice figure that people can wrap their heads around. But if you consider the size of their audience and the ad tiers available in a dozen countries, that's a very low monetization. They're making more money on the ad free tier per member, and they even said that too.

(09:49):

So that suggests there's not a lot of time spent among ad supported viewers. If you're reaching a mass audience and around the world and making 1.5 billion, those members are not spending that much time per month the way that Netflix viewers have historically engaged with the platform. You got a lot of casual viewers who are using that as a third or fourth service when they're on the ad plan is what it looks like.

Marcus Johnson (10:18):

They've grown it well so far though. It is still low, but it's grown two and a half fold in the last year or two. So it is growing well. They also expect the ad revenue to double this year in 2026 to hit that $3 billion milestone. But compared to the $51 billion that they're hoping for, again, it's a very small slither. What do you make of ad revenue going forwards? What do you think is going to be driving it and how far do you think they can take this? Will there always be a relatively small slither of their revenue, do you believe?

Ross Benes (10:51):

It's going to be a smallest sliver for the foreseeable future. I mean, for it to be a good chunk of the revenue, they'd have to almost 10X it. You know what I mean? You're looking at the subscription side is just massively, not 10X, but for it to be a good size of their revenue, they're going to have to greatly exceed their projections, and that's probably not realistic. So I think it's going to be a nice little revenue stream that pales a comparison to the subscriptions. To get more ad revenue, they need more viewing time on the ad supported tier because they already have relatively high CPMs. They have low ad loads, but they've also indicated that their fill rates are where they want them to be. So they probably have some unsold inventory. You just need people spending more time with ad supported viewing.

(11:49):

And live events are one way to do that, but they've even said on the call, live events, they're the splashiest things they do and they're doing more of them, but that's a small portion of total Netflix viewing. Even when they have a big fight or NFL game, that doesn't stack up against the billions of hours people are spending watching all these scripted shows.

Marcus Johnson (12:17):

So let me ask you this. Do you think it's more of a concern or more important for them to squeeze more time out of current users or keep the time attributed to each current user the same and add more additional users?

Ross Benes (12:31):

It's obviously ideal to add more additional users, but it's hard to do that in most countries for them at this point because they are so established. They're so successful. Most people who stream are already using Netflix. So at that point, I think you need to start driving more time spent with the current users so that the gap in revenue per membership is closer on the ad free plan and the ad tier plan.

Marcus Johnson (13:04):

I agree with you. I had Netflix expecting to double ad revenue 2026 down here. So I think ad revenue definitely is one of their top things. I think this leads me in quite nicely to what I think is the third big question for Netflix at the moment, which is subscriber growth and how concerned they should or shouldn't be about it. I was wondering, Ross, could they, would they, should they introduce a Netflix freemium version as an option? So Netflix, they're competing with YouTube to a certain extent to be the champion of the screen. Netflix added 41 million paid subscribers in 2024. They just added 25 million last year. So from 41 to 25, that means growth went from 16% to 8% 2024 to 2025. Netflix said that factoring in the number of people watching per household, its total audience is approaching one billion people globally. We forecast Netflix viewers to be about 835 million worldwide. YouTube has 2.7 billion.

(14:02):

And so I wonder if a freemium version with ads, maybe not a billion ads, but more ads than they have on their current one that offers games, podcasts, perhaps a handful of movies and shows to sweeten the deal could help grow subscribers and get it closer to YouTube's scale over time. What do you think?

Ross Benes (14:19):

Well, that's an interesting way to look at it. I don't know if it would grow subscribers a lot, but it would grow ad revenue. It'd be like a fast channel essentially. So putting some content out there for free to generate more ad viewing makes sense when you consider the success of YouTube as well as Pluto and Tubi. But they'd be kind of going against the grain a little bit because subscription services used to have free ad supported tiers more often several years ago. So what I'm getting at is if you go way back, there used to be a free version of Hulu that would have a limited number of shows and it was very ad supported. This is many years. Then you go back more recently, there used to be a free tier of Peacock. There also used to be Amazon Freevee, which was before was called IMDB TV.

Marcus Johnson (15:17):

Oh yeah. Yeah.

Ross Benes (15:18):

So those things don't exist anymore. To get Peacock and Hulu, you have to pay. Even if you're on the ad plan, you have to pay a membership fee. So subscription streaming services in recent years have decided it's not worth it for them to offer that free tier. If Netflix decided to do that, I would love to know what their thinking is on why they would go against that trend. And maybe that is the right move, but it would just be different than what we've seen from others.

Marcus Johnson (15:50):

Yeah. Yeah, that's a great point. Yeah, maybe a couple of bucks is what they do [inaudible 00:15:56] to your point, no one's doing it for absolutely free. So maybe they generate a bit of revenue from charging two, three dollars. But yeah, I didn't know how much of a concern it was, because it seems like quite a slowdown in growth. You've gone from 16% one year to 8% the next, and then what could you be hoping for in this coming year given that trend? Even if you don't cut growth in half, it's still slowing down to what will soon be mid single digits, which is not brilliant. Again, especially compared to someone like a YouTube where everyone can just switch it on and go.

Ross Benes (16:31):

Well, if they do complete the Warner deal, they'll also have to contend with they'll be getting into a whole other line of business than they've been in. So they have a lot to manage because they could potentially be in theatrical soon if this all goes to plan and they keep their promises that they've given about the Warner deal.

Marcus Johnson (16:54):

Yeah. Yeah. In Netflix's defense, call it a billion if they're saying approaching a billion global viewers, and we say that YouTube is 2.7 billion. At least in the US, they're doing incredibly well. Netflix accounting for 9% of all Americans TV time versus YouTube's 13% according to Nielsen. Even if it buys Warner Brothers Discovery, Ross, that takes its TV time, Netflix will go from nine to 10.4, so inching a lot closer to that YouTube number.

Ross Benes (17:26):

And YouTube's beating everyone.

Marcus Johnson (17:29):

Yes. Yes. They are.

Ross Benes (17:31):

So it'd be Netflix, YouTube, and then everyone else. Even if you look at Disney or NBC across their entire portfolio of TV networks plus streaming services, YouTube is out ahead. So if you're within range of YouTube, even if you're not beating them, I mean, you're doing pretty well and very commonly used by consumers.

Marcus Johnson (17:53):

Yeah. Yeah. You basically have to add up the next, was it three, four? Yeah, Disney, if you add Disney and Prime together, they are still... Yeah, you'd basically add up to what Netflix has right now, and then after that, you're talking about companies that are Roku channel, 3% of time, Paramount, two and a half percent of time, et cetera. So it is those two and then everybody else. All right. So what else do we have? Anything else you want to add to this list of the most important questions for Netflix right now?

Ross Benes (18:27):

It's a minor question compared to the ones that we've gotten into, but they have video game aspirations and they do talk about them during their earnings calls. I would love to know if they have a revenue goal they need to eventually hit for those video games to keep investing in them, because right now they just come with your subscription and it doesn't seem like they have a lot of engagement. How long do you think you have to be in that space before it starts paying off for you and becomes a real significant part of the business?

Marcus Johnson (19:05):

Yeah. I kind of liken it to the Amazon store strategy. They're trying to do something and they definitely haven't figured it out yet. Do you keep investing, or Meta and the Metaverse-

Ross Benes (19:17):

Yeah.

Marcus Johnson (19:17):

At some point, all those billions of dollars you've-

Ross Benes (19:20):

And Apple TV is kind of the same thing?

Marcus Johnson (19:23):

Yeah. Yeah, that's a good one. All right. I think we've got our list. Do you have anything else or do you think this is-

Ross Benes (19:31):

That's a good list.

Marcus Johnson (19:32):

It's probably the top three. Yeah. Netflix, will they be able to actually buy Warner Brothers Discovery? What's going to happen? That's number one. Number two, what's going to happen with their ad revenue? This year is one and a half billion decent considering it's only been selling ads for a couple of years or not good enough considering the scale of Netflix? And then also, how concerned are should they be about subscriber growth, and are there other initiatives, ways that they can generate or boost their subscriber numbers? Obviously they stopped reporting last year, but they've given us this full year number. So [inaudible 00:20:07]-

Ross Benes (20:07):

Everyone's stopping reporting. Disney's about to stop reporting. We're getting our last update.

Marcus Johnson (20:11):

You said Disney?

Ross Benes (20:13):

Yep.

Marcus Johnson (20:13):

Yeah. Yeah. All right. I think that's a nice clean list. We had pretty much the same thing, so that worked out quite well. That's what we got time for for this episode. Ross, thank you so much for joining me today.

Ross Benes (20:23):

Thanks, Marcus.

Marcus Johnson (20:24):

Yes. And thank you, of course, to the whole production crew, Danny and John helping out with this one. And thanks to everyone for listening to Behind the Numbers, an EMARKETER video podcast made possible by Seedtag. Tune in tomorrow for the Reimagining Retail show where host, Suzy Davidkhanian, will be talking to Paul Verna, Blake Droesch, as well, all about advertising at the Super Bowl.