Netflix in a Race Against Time With Advertising

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Say this much for

Netflix

NFLX 1.58%

—when they pivot, they don’t waste time.

Barely two months after the streaming giant first signaled its interest in launching an advertising supported tier of service, Netflix is moving fast. The Wall Street Journal reported earlier this week that the company has been talking with potential partners, with the front-runners being online ad titan Google and

Comcast’s

NBCUniversal. Netflix co-Chief Executive Officer

Ted Sarandos

confirmed these talks Thursday during an appearance at the Cannes Lions conference, one of the ad industry’s largest annual gatherings.

Partnering with established advertising players would ease Netflix’s entry into a business it has long avoided. It is also the least expensive way in, especially compared with the build-it or buy-it options companies commonly use to move into new fields. Building up the necessary advertising expertise and staffing in-house would take time and require Netflix to do expensive recruiting from established media rivals that have their own streaming platforms to manage. It would also come when morale at Netflix isn’t the greatest; the company confirmed Thursday its second round of layoffs in as many months, this one around 300 people.

Buying in would be time consuming and costly too, especially for a company that has to direct much of its cash flow to keeping the content flowing.

The Trade Desk,

which runs a digital ad platform focused mostly on connected TVs, carries a market value over $20 billion. Netflix has also studiously avoided major acquisitions in the past and seems inclined to keep it that way. Mr. Sarandos used his recent appearance to shoot down speculation about the company buying

Roku.

“We don’t need it,” he said.

Netflix has powerful reasons to move into ads quickly. Growing inflation and the specter of a global recession are a poor backdrop for a company trying to restart subscriber growth while also charging some of the highest prices relative to other streaming services. A survey by Evercore ISI last month found that Netflix users’ satisfaction score fell 7 percentage points during the second quarter to the lowest point for the service since 2012. And market research firm NPD Group reported Thursday the results of its latest TV Switching Study, which showed cost jumping from the No. 4 reason for canceling a streaming service to No. 2.

Netflix’s subscriber count fell for the first time in nearly a decade, causing its stock to post its worst one-day percentage decline since 2004. WSJ’s Joe Flint walks us through three strategies the company might try to continue growing, and what the changes could mean for other streamers. CORRECTION: An earlier version of this caption said Netflix’s stock plummeted to its lowest point since 2004.

Netflix still has a commanding place in streaming. A survey of more than 1,200 U.S. consumers by BofA Securities reported Thursday found 79% of respondents subscribed to the service, well above all other competitors. But that also leaves few premium subscribers left to tap, making growth even more reliant on adding an ad-supported option.

SHARE YOUR THOUGHTS

What do you think of Netflix’s plans to offer an ad-supported service? Join the conversation below.

Meanwhile, Netflix shares remain around their lowest level in nearly five years after the company’s first-quarter results in April sparked a brutal selloff. Barely one-quarter of analysts now rate Netflix as a buy, and many consider the stock “dead money” until the company shows traction with ads or reverses its recent subscriber decline. The debate over build versus buy requires the luxury of time that Netflix doesn’t have.

Write to Dan Gallagher at [email protected]

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