Netflix (NFLX +0.15%) surprised investors when management shared its plans to start offering an ad-supported tier of the streaming service in the near future. The company has long eschewed the idea of advertisements on its platform, but it's gotten to work quickly as it looks to stem subscriber losses.
Importantly, the company is looking to partner with other companies in order to streamline the operation. "We can be a straight publisher and have other people do all of the fancy ad-matching," co-CEO Reed Hastings said during Netflix's first-quarter earnings call. With the massive popularity of Netflix, those "other people" could have a big opportunity ahead.
Here are four companies that could benefit from Netflix's advertising plans.
1. Alphabet
Alphabet's (GOOG +1.10%) (GOOGL +1.31%) Google is an absolute beast when it comes to digital advertising. That said, its premium video advertising experience is limited. While YouTube generated $29 billion in ad revenue for the company last year, Netflix might want more premium advertisements than the standard ad seen next to user-uploaded videos on YouTube. Something more akin to television commercials.
Google has been pushing into that market. It operates YouTube TV, where it's tasked with filling a couple of minutes of advertising for every hour of programming. It's also worked with Disney since late 2018, serving ads across video, desktop, and mobile.
The real value Google brings to the table is that it has a global user base, just like Netflix. In fact, YouTube is the only streaming service more widely used than Netflix. If the streaming service company wants a simple one-stop shop, Google is it.
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2. Comcast
Comcast's (CMCSA +0.43%) media subsidiary NBCUniversal is a massive ad seller and a leader in ad technology for television. Its Freewheel ad technology could be the backbone for streaming ads on Netflix, as it already is on its own Peacock platform and several other streaming services.
Moreover, NBCUniversal already has an ad sales team set up in the U.S. and Europe that could source premium ads for all the inventory coming to Netflix. As such, Netflix might be able to generate the highest revenue per ad impression in those regions by partnering with NBCUniversal.
Despite NBCUniversal's competitive position against Netflix, its ad-tech platform is widely used throughout the media industry. Disney used Freewheel before it switched to Google, for example. So despite the conflict of interest, it's capable of supporting other media companies.
For Netflix to work with NBCUniversal, it may need to find an additional partner or hire some staff in-house for ad sales and integration outside of Europe and the U.S. It's not clear if that's something it's looking to do, but outsourcing could be difficult as The Wall Street Journal reports NBCUniversal is looking for an exclusive contract.
3. Roku
Rumors began swirling that Netflix was interested in buying Roku (ROKU +0.83%) earlier this month. That might not be the best investment Netflix could make, and partnering with the connected-TV platform could be a much more reasonable choice.
Roku could benefit from an ad-supported tier by using it as an opportunity to renegotiate its distribution agreement with Netflix. Roku may look to take a share of the advertising on Netflix, participating in the upside potential of the product instead of taking a flat commission on customers who sign up for the service through its platform. It could also push Netflix to buy ads on its home screen, something it's managed to get Netflix's competitors to do in its negotiations. Disney, for example, often does home-screen takeovers for new Disney+ releases on Roku's platform.
4. The Trade Desk
The Trade Desk (TTD +5.53%) offers a demand-side platform that connects media ad buyers with premium connected-TV ad inventory. Netflix could offer excess inventory that it or its partners haven't sold directly through The Trade Desk, enabling it to maintain high-quality ads while keeping a lean advertising sales team.
The Trade Desk generates revenue by charging ad buyers a percentage of gross spend on its platform. If it has more premium ad inventory to fill via a partnership with Netflix, it ought to be able to increase revenue. Estimates put the amount of annual advertising spend on Netflix in the U.S. and Canada alone at around $2.5 billion. Granted, that likely wouldn't all go through The Trade Desk, depending on Netflix's other ad-tech partners, but a significant chunk could end up coming from its buyers.
Netflix could be a pivotal partner
As Netflix moves toward launching its ad-supported tier, investors will want to pay close attention to which company it partners with, as they could provide a significant boost to revenue over time. While it might take some time for advertising to become a significant part of Netflix's business, the impact could be seen much more quickly for any of the above companies.
