Few Wall Street pros get the streaming landscape better than Needham's Laura Martin. She was an early believer in Roku (ROKU -0.83%) back when everyone else thought it was just a dongle maker. She had faith in fuboTV (FUBO 1.47%) when it was fashionable to be bearish on the live-TV streaming specialist. 

Last week, she was critical of Netflix (NFLX 1.08%) and its stance on refusing to run advertising. Unlike its rivals that offer cheaper ad-supported subscriptions -- or platforms including Roku and fuboTV that just work marketing missives into their business models for all viewers -- Netflix has avoided the siren song of Madison Avenue.

Needham feels that Netflix is making a mistake by not adding ads. The connected-TV advertising market is blowing up, and in her latest research note, she laments the money that Netflix is leaving on the table by focusing more on the subscriber experience than generating incremental revenue.

Two people watching something scary on TV. One is holding popcorn, and the other is covering their face with a pillow.

Image source: Getty Images.

Mad men

Ad revenue is a major part of the business model for most streaming platforms. Martin doesn't have a problem spelling out the opportunity cost for Netflix here. Roku's ad revenue per user has been $32.14 for the 12 months ending in March, a 32% increase over the past year. Roku is a free service, making ad revenue the primary top-line driver.

The landscape gets even kinder when we consider premium services where advertising is a secondary revenue stream. FuboTV clocked in with $7.11 a month in ad revenue per subscriber for its latest quarter, a 57% surge over the past year. We're talking about more than $85 a year in ad revenue per user for fuboTV at that run rate -- and that's on top of the hefty monthly subscriptions.

Needham's math on the opportunity cost is the $70 per year that traditional linear TV is averaging in ad revenue per viewer. Based on last-year's subscriber tally, Netflix dismissed $14 billion in ad revenue at $70 per subscriber, a move that would've boosted its top-line results by 56% in 2020.

Obviously, it's not as easy as the jaw-dropping math. For starters, Netflix has become the default streaming service for more than 200 million homes across the world because it values the viewer experience over what marketers want. Would Netflix be as popular as it is today if it were wedging ad breaks into its content or stamping its landing pages with third-party promotions?

We also can't dismiss the role of advertising on Roku. The lion's share of the ad revenue on Roku comes from streaming services vying for attention. Do you really think Netflix wants to be running WandaVision and In The Heights ads?

Obviously, there are more conventional video and display ads out there, as they populate the experience of the cheaper ad-supported plans offered by Netflix's smaller premium rivals. The point here is simply that it's not all incremental.

Netflix has been able to push out five price increases over the past seven years -- going from $7.99 to $13.99 a month -- because subscribers enjoy the experience. Would they be tolerant of the next increase if marketers were lurking behind the paywall?

There is room for advertising on Netflix, but you can't lament the upside without considering the downside. Netflix didn't become the leader among streaming service stocks by following everybody else.