There is no word more crucial to the health of a publicly traded company in the United States of America than “growth.” It is that central, quantifiable concept that can galvanize Wall Street to elevate a stock to newfound heights, providing ample financial runway and C-suite bonuses in the process. At the same time, the appearance of a lack of growth can lead investors to punish share prices, erasing billions in company value and leading to the ouster of executives by the time of the closing bell.
When it comes to growth, perhaps no company is more of a compelling enigma than Netflix. The market-leading streaming service announced earlier this year that it would stop providing quarterly subscriber updates beginning in January 2025. In lieu of that integral figure that has propelled Netflix’s envy-inducing surge over the last decade, the company is in need of a new growth narrative to sell to Wall Street. Yarn-spinning is a key tenet of business, after all.
Co-CEOs Ted Sarandos and Greg Peters have signaled that revenue and profit will be the primary measures of success moving forward. But the continued upward trajectory of revenue and profit will be largely dependent on how effectively Netflix can scale its ad-supported business. In its third quarter financial earnings report, Netflix said that ad membership was up 35% quarter on quarter and that more than 50% of sign-ups in its 12 ad-supported markets came via the ad-tier. However, the company also conceded that it doesn’t “expect ads to be a primary driver of our revenue growth in 2025.”
In order to help determine Netflix’s future outlook, we need to understand if the ad-supported tier is helping to generate new subscription growth. From there, we can identify content strategies that are working to elicit new sign-ups and appeal to specific audience demographics while identifying expansion opportunities.
As seemingly the entire streaming industry embraces the tried and true practice of ad-supported programming, these learnings can be applied across the board moving forward.
Is advertising boosting Netflix subscriptions?
Netflix has been cagey when it comes to the number of subscribers signing up for its ad-supported tier (though at least the company acknowledged the “short term drag” on average revenue per user it’s creating). But using Parrot Analytics’ Streaming Metrics, we can estimate the country-level subscriber growth between ad-free markets and ad-supported markets.
In the graph below, the red bars represent markets where ad-supported Netflix tiers are available while the yellow bars represent the ad-free markets.
Prior to the introduction of ad plans two years ago, both cohorts grew on average at roughly the same speed in the eight preceding quarters. Once the ad-supported plan was introduced in late 2022, and password-sharing crackdowns were initiated in 2023, the ad-supported markets produced steady upside. The red cohort grew twice as fast and the yellow cohort grew four times as fast. In Q3, Parrot estimates that around 40% of Netflix’s global net adds came from ad-supported markets.
Even as the ad-supported tier will not contribute meaningful revenue growth in 2025, by Netflix’s own admission, the offering is growing.
Which content strategies are (and aren’t) driving this growth?
It’s one thing to roll out a less expensive ad-tier and chalk up its growth entirely to price sensitivity. Yes, consumers can be cost-conscious; who knew?! Unlocking actual audience behavior insights requires a deeper dive into what is and isn’t working on-screen. Let’s start with the latter.
The left chart represents ad-free Netflix markets while the right chart represents ad-supported Netflix markets. English-language titles clearly have a significant global footprint as anglophone countries are among the biggest programming exporters in the world. As such, English language content helps to drive growth in Netflix’s international ad-free territories. However, in Netflix’s ad-supported markets — which counts English-speaking countries such as the US, Canada, United Kingdom and Australia — English speaking content has a negligible impact on subscription growth.
This begs the question: is local content the secret sauce?
On average in the 12 ad-supported Netflix countries, we see that only 5%-6% of catalog titles are local, per Parrot Analytics’ Content Panorama. But when we plot on the right how each market is growing subscriptions in Q3 on the Y-axis and we compare it to how much demand for local content is growing, we see a linear relationship for both TV and movies. For example, Japanese anime Delicious in Dungeon was among the Netflix leaders in revenue contribution in the APAC region during Q3, per Parrot Analytics’ Content Valuation.
Long story short: long content for local markets is good. Audiences naturally enjoy watching programming in their native languages. This is why Netflix’s unrivaled years long investments in overseas markets has built a commanding lead in international market share. And since growth in the UCAN region is largely saturated, international will account for the vast majority of new streaming customers industry wide.
The next extension of this line of thinking is to figure out which is more effective: creating local originals from scratch or licensing existing local titles. Both account for barely a sliver of Netflix’s total ad-supported catalogs: just 6% of licensed content is local while 4% is original. A small piece of the pie in both instances.
But as you can see in the chart on the right below, licensing existing local content is twice as effective as local originals in driving subscription growth. We see this borne out more generally too. The average demand of the 10 most in-demand licensed titles available on Netflix in the US in Q3 was 43% higher than the average of the top 10 most in-demand originals. Zooming out beyond the upper echelon, the average demand of all licensed titles available on Netflix last quarter was 107% higher than the average demand of all original titles. (We see similar splits for Hulu and other platforms).
Crucially, this is a far more cost effective than a tidal wave of in-house development and marketing for new originals. Audience’s brand awareness for existing titles — especially those that have enjoyed wide reach thanks to linear distribution — far exceeds brand awareness for new titles.
From here, we can get even more granular. Specifically, which entertainment format works better: local language licensed movies or local language licensed TV series?
As it turns out, local movies represent just 5% of the supply of all licensed movies, compared to 22% for local TV shows. Despite this notable disparity in volume, these movies command far greater levels of audience demand and, therefore, contribute more overall value to ad-supported subscription growth in these 12 markets.
When looking at the most in-demand films available on Netflix in Q3 in ad-tier markets, Godzilla Minus One (Japanese) and Kalki 2898-AD (Telugu, Hindi) were the most common non-English appearances in the Top 10s. At least one non-English film ranked in the Top 10 across all of Netflix’s ad-supported markets last quarter: US (2), Canada (2), Mexico (2), Australia (2), Brazil (5), France (1), Germany (1), Italy (2), Japan (10), South Korea (9), Spain (3), UK (2).
This is a particularly compelling trend given the overall value produced by TV and film. Six of the eight major streaming services, including Netflix, saw TV shows generate a larger share of on-platform total catalog demand than film during the first three quarters of the year in the US. Generally speaking, TV series offer longer tails of engagement, though movies provide a consistent pop of acquisition power.
Ad-Supported Audience Demographics
Now that we’ve identified local language licensed movies as the primary engine behind Netflix’s ad-supported market growth, we can hone in on the audience demographics profile at play.
In these 12 markets, 92% of movies available on Netflix are licensed compared to 27% of TV series. As it turns out, licensed TV shows elicit engagement and interest from both younger and older demographics. However, movies tend to over-index with Zennials, Millennials and Gen X+ while Gen Z is largely ambivalent towards these film libraries. As such, Netflix’s ad-tier appears to be resonating more with older consumers versus younger customers despite the lower price.
So what does work for younger audiences? Let’s break it down by medium so that those hoping to super charge their ad tiers with the up-and-coming generation know how to do so.
Film
According to Parrot Analytics’ Audience Solutions, Gen Z (15-24) accounts for roughly 27% of the global entertainment audience, more than any other generational group. This positions them as the most critical audience cluster for the future of streaming media.
Using Parrot Analytics’ Demand data and Audience Demographics, we can identify titles released between January 2022-August 2024 that scored high average audience demand during the first 60 days of release and boast a high share of Gen Z interest in the US. These titles are highlighted in the shaded area of the chart (top right corner).
The first major takeaway is how franchise titles and popular IP films continue to resonate with Gen Z. Specifically, animated franchises show very consistent success. Recent installments such as Despicable Me 4, Sonic the Hedgehog 2, Puss in Boots: The Last Wish and Inside Out 2 all count more than 50% of their audiences from Gen Z while generating outstanding levels of audience demand. Name brands such as Barbie and Pixar (Turning Red) are also among the most in-demand films that appealed to Gen Z here.
Live-Action franchise films also tended to do fairly well with the young audience. Deadpool & Wolverine, Godzilla X Kong: The New Empire and Fast X may be part of longer-running IPs, but scored big with Gen Z. However, Marvel and DC’s efforts in the last two years have been hit (Doctor Strange and the Multiverse of Madness, Blue Beetle) or miss (The Marvels, The Batman) with these young viewers.
When moving outside of the franchise foundation, Gen Z shows an affinity for recent romantic dramas such as It Ends With Us and Challengers (the latter stars Zendaya, who also shows up in the next section).
TV
As largely digital natives, Gen Z is accustomed to a wealth of on-demand programming at their fingertips at all times. As such, it takes a unique approach to grab their attention away from the short-form content and gaming programming that has largely captured their interest.
Similar to film, animated TV programming shows a pretty consistent track record of resonance with Gen Z since 2022. Japanese animation such as My Hero Academia, Attack on Titan and One Piece draw significant Gen Z viewers. American animated shows such as Amazon’s superhero series Invincible and Lucasfilm’s Star Wars: The Clone Wars do the same.
Dramas based on brand IP continue to work wonders with these viewers. Amazon’s video game adaptation Fallout, Netflix’s Addams Family reinvention Wednesday, and Marvel’s Loki are stand out examples. (Loki is the most Gen Z skewing offering from the MCU’s robust TV slate). Zendaya’s Euphoria, the only series here that isn’t based on a pre-existing IP, underscores the strategic importance select star power can have on a given demo.
TV series near the X-axis such as Rick and Morty and The Last Of Us continually highlight the importance of animation and brand IP while Grey’s Anatomy shows how a long-running recyclable format can amass a multi-generational fan base. On the opposite end of the spectrum are longer-running IP such as The Simpsons, Saturday Night Live and even Disney+’s The Mandalorian, that primarily skew older and may struggle to break through with young generations at this point.
The top left quadrant shows series that over-index significantly with Gen Z, but didn’t generate high overall demand totals upon release. Once again, animation takes the cake here with comic book based movie spinoff Scott Pilgrim Takes Off, the high-concept anime-inspired Rwby and video game adaptation spinoff Cyberpunk: Edgerunners.
Conclusion
Netflix, Amazon Prime Video, Disney+, Paramount+, Hulu, Peacock and Max all offer ad-supported tiers while Apple TV+ is reportedly considering developing one. The Peak TV era is well and truly over as the industry has moved on from the voluminous creative experimentation of the streaming boom to the more broad appeal programming of profitability. That means leveraging ad-supported content tiers to support subscriber growth, and streaming revenue/profit.
Doing so isn’t as simple as offering consumers a less expensive option and selling ad inventory. It requires an understanding of optimal library construction across various languages, film vs TV, original vs licensed and the ability to program effectively for multiple audience demographic preferences.
As Netflix phases out subscriber updates in hopes that its financials can speak for the good health of the entire company, its advertising initiatives will need to do plenty of heavy lifting moving forward. The same goes for the rest of the industry as they approach SVOD saturation. Knowing how to navigate the next stage of their respect growth development is absolutely critical for long-term survival.
It is clear that the economics of streaming are entering a new phase. The industry's shift towards ad-supported models reflects broader economic pressures - rising content costs, market saturation, and the need for diversified revenue streams. Advertising initiatives will not only need to drive subscriber growth but also enhance profitability to justify the massive investments in content creation and licensing.
For all players in the streaming arena, a deep understanding of the underlying economics - from cost per acquisition to lifetime customer value - is becoming indispensable. Navigating these economic complexities is critical for long-term survival and success in an increasingly competitive and mature market.
