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Paramount Isn't Flinching as Netflix Enters Battle for Advertising Dollars

Netflix is in the planning stages of an ad-supported tier, but Paramount+ already has a dual revenue structure that Paramount Global sees as being formidable.
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Netflix's  (NFLX)  stock has been on the rebound since the streaming giant's second quarter earnings release on July 20. 

There was good news and bad news coming out of the company's latest quarter with the loss of 970,000 paid subscribers falling short of Netflix's own guidance for a 2 million subscriber loss. 

In the first quarter the company lost 200,000 global subscribers for the first time in its history. The stock's subsequent 35% decline was unprecedented.  

In response, the company began a wave of layoffs, and had observers wondering if the company had hit a natural ceiling of customers and if it's time as the undisputed king of streaming had come to an end.

But Netflix also expects to return to adding subscribers in the coming quarter, replacing the departed subscribers with 1 million new ones. 

Netflix entered the streaming wars as the market share leader and it intends to emerge from them as the lead dog. 

But part of the reason Netflix has been faltering in recent quarters is the emergence of more rivals from traditional broadcast networks. 

Paramount+ Puts Pressure on Netflix

Paramount+ may be a new player in the streaming wars, but it does have the backing on Paramount Global  (PARA)  and the media library that comes with a major movie and television studio. 

Paramount+ added 4.9 million subscribers in the second quarter and as of June 30 the service boasted 43.3 million subs despite the removal of 1.2 million subs in Russia. 

"Q2 shows the company is taking market share in streaming, in broadcast, in box office, and in upfront dollars. It also shows the company increasing its penetration of the most important growth market in media, streaming, as evidenced by our over 5 million D2C subs added in the quarter," CEO Bob Bakish said. 

Paramount is one of the few streamers with a dual revenue stream model featuring both subscription and advertising options. That model delivered 56% year over year revenue growth for the company's direct-to-consumer service. 

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Overall streaming revenue reached $1.2 billion with a 74% increase in subscription revenue and a 25% increase in advertising revenue (though those advertising contracts were signed in previous quarters and do no necessarily represent the present environment). 

Meanwhile, Netflix is planning to launch an ad-supported streaming service of its own. 

An ad-support plan could bring in an additional 4.3 million subscribers in the U.S. and Canada, Netflix analyst John Blackledge from Cowen estimated earlier this month, helping its global total rise to around 240 million by the end of next year.

But Bakish isn't worried about Netflix syphoning off advertising dollars from his company. 

"We've been a multi-platform ad business for years, and that gives us very high quality reach and a scale of over a trillion ad impressions per year across all demographics," Bakish said. 

"And then you add to that industry-leading integrated advertising and advanced advertising capabilities and really a long track record of partnership and customer services with agencies and their clients."

Uncertain Advertising Environment

Before the earnings release, analysts at MoffettNathanson lowered its projections for Paramount in 2023 due to expected softness in advertising. 

“Looking back at prior recessions, traditional media ad formats such as TV and print focused on brand advertising, have notably underperformed online advertising," analyst Michael Nathanson said, according to the Hollywood Reporter

Advertising budgets are historically one of the first things to be cut during an economic downturn as companies focus on more core needs. 

So advertising dollars will be at a premium in the next phase of the streaming wars, especially if/when Netflix enters that arena. 

But Paramount believes it is prepared to take on whatever Netflix has to offer.

"Our audience reach across broadcast, cable, ad-supported SVOD at Paramount+, and free ad-supported TV at Pluto TV represents a connected viewing ecosystem that produces over 1 trillion ad impressions per year in high engagement premium environments that are proven to drive outcomes for clients," Bakish said.