Netflix continues to lead the premium streaming-video world, reporting a record-breaking addition of 8 million new subscribers in the second quarter of 2024, reaching a total of 277.7 million worldwide. The company exceeded sales and profit expectations and raised its full-year revenue and margin forecasts for 2024. Additionally, Netflix secured 107 Emmy nominations, leading this year’s field.

“This is what winning looks like,” Pivotal Research Group analyst Jeff Wlodarczak remarked regarding Netflix’s Q2 results. Similarly, MoffettNathanson’s Robert Fishman expressed confidence in Netflix’s future, stating, “We do not see any rough seas ahead for Netflix.”

However, a notable challenge persists: Netflix’s fledgling advertising business is struggling to monetize its expanding user base. Although its cheaper, ad-supported plans are gaining popularity—accounting for over 45% of all signups in its ads markets and showing a 34% sequential growth in Q2—total ad sales have not kept up with the increasing viewership, which averages nearly two hours per day per member. “We’re racing behind, essentially, to fulfill all of that increasing inventory and we’re lagging in that regard,” said co-CEO Greg Peters during Netflix’s Q2 earnings interview.

Netflix, after initially rejecting advertising, introduced ad-supported plans in early 2022 following a rare subscriber drop. Morgan Stanley projects that Netflix’s ad business will reach $7.1 billion by 2027, comprising $3.1 billion in ad sales and $4 billion in subscriber fees, representing 13.5% of its total projected revenue.

In its Q2 shareholder letter, Netflix stated that it aims to achieve critical ad subscriber scale by 2025 in its ad countries. However, the company doesn’t anticipate advertising to be a primary revenue growth driver in 2024 or 2025, acknowledging that “building a business from scratch takes time.” Netflix reported having 40 million global monthly active users on its ad tier, up from 23 million in January and 5 million a year ago, but did not provide a geographical breakdown.

Netflix’s ad sales leadership is undergoing changes, with Madison Avenue veteran Peter Naylor departing as head of ad sales, following the replacement of former ad boss Jeremi Gorman with Amy Reinhard, ex-head of studio operations. Netflix is developing an in-house ad tech platform, set to begin testing in Canada in 2024 and launch broadly in 2025, transitioning from its initial partner, Microsoft’s Xandr. The company is also expanding its ad-serving partners to include the Trade Desk, Google DV 360, and Magnite, aiming to enhance ad relevancy, targeting, and measurement.

“Advertisers want us to have all those features in place today,” Peters noted. “The biggest negative feedback we get is that we aren’t there right now.” He added, “We’ve got the hard work ahead of us of building those as quickly as we possibly can and closing that gap as soon as we can… Quite frankly, as we build those features, I am quite certain that there will be more that will come on to the roster that advertisers will be asking for us and more than we’ll go be excited about doing.”

While challenges remain, there is confidence in Netflix’s ability to strengthen its ad operations. As MoffettNathanson’s Fishman pointed out, “the onus is now on Netflix to build out its ad sales, measurement and tech capabilities necessary to grow this business for the long term.”