Netflix shares dropped sharply as the markets opened Thursday, following a report that the streaming service’s new ad-supported tier isn’t pulling in the number of viewers promised, forcing it to allow advertisers to take money back.
The stock fell 5.3% to $300.95 after the opening bell.
Netflix shares closed Wednesday’s trading down 41% from the start of the year, nearly three times the decline in the S&P 500. The broader markets also slipped at the opening bell, with the S&P and Dow Jones Industrial Average both down about 1% and the tech-heavy Nasdaq down 1.3%.
Netflix’s latest slide followed a report by Digiday that said that said advertisers are getting money back for ads that have yet to run, and in some cases, Netflix has delivered only 80% of the expected audience.
“They can’t deliver,” one of five unnamed agency executives who was familiar with the situation told the news outlet. “They don’t have enough inventory to deliver. So they’re literally giving the money back.”
Netflix launched its discounted $6.99 monthly ad-supported tier in early November, following a strong third quarter that saw subscriber gains for the first time this year. While some market watchers cheered both the quarterly results, which saw 2.4 million subscriber additions, and the launch of the ad-supported tier, skeptics have questioned the strategy amid growing competition in the streaming space.
Among the concerns are whether it would pull in enough cash to offset negative brand impact from customers unhappy to see ads arive on the platform. There’s also worry that customers who downgrade to the ad-supported tier for economic reasons increased subscriber churn amid a bevy of new offerings.
There’s also the fear that premium customers could flock to the lower-priced tier and cannibalize Netflix’s existing subscriber base.
But for now, the report indicates that the ad-supported tier is in fact not drawing the numbers Netflix promised its early advertisers.
Digiday said the company structured its first deals on a “pay on delivery” basis, so that advertisers would only pay for the viewers they actually reached. The agency executives told the outlet that the agreements said Netflix would release any unspent ad dollars at the end of the quarter, rather than offering “make-goods” to advertisers like traditional TV networks do.
The sources said not all advertisers have clawed back their cash, and those that have are more seasonally based accounts running ads timed to the fourth quarter and holiday shopping.
“Pacing was well below expectations, so some advertisers pushed for money back now so we could spend it in the critical holiday time period, and they deserve credit that, in the vain of partnership, [they] have agreed,” another agency executive told Digiday.
“Clients with shorter flights in particular are having a hard time delivering to goal,” said a third agency executive.
Other advertisers have asked to move their dollars to the first quarter of 2023 or later, the report said.
The agency executives also posited that the problems related more to Netflix’s quick rollout of the tier rather than a warning sign of the effort’s long-term prospects.