Big Spender Netflix Cuts its Web Ad Budget

by: David Jackson

Netflix has historically been one of the largest advertisers on the Internet. Here's the discussion from its conference call about its Q2 ad spend and future budget:

With the seasonal decline in subscriber acquisition in Q2, our marketing expense declined by $15 million, or 27% sequentially to just under 10% of revenue. As a percent of revenue, this represents the lowest quarterly marketing spend in our history as a public company. In Q2, we expensed $40.1 million on marketing. That’s $5.2 million less than we expensed in Q2 of last year or about an 11% decrease in marketing expense. What’s remarkable about the lower spending is that gross subscriber additions continued to grow anyway on a year-over-year basis.

SAC [subscriber acquisition cost] declined again this quarter to just under $29, the lowest SAC has ever been since taking the company public in 2002. This seasonal decline in marketing spending was the primary contributor to the increase in operating income in the quarter.

Later, in the Q&A:

Deborah Crawford

The first question is from Barton Crockett at J.P. Morgan; first question, what drove down SAC? Lower pricing of media, i.e. lower Yahoo! CPMs or was advertising simply more effective? Could that be a function of better word of mouth, impact of service trends, or greater consumer interest, perhaps due to higher gas prices?

Reed Hastings

I don’t think it’s the outside advertising climate, which hasn’t shifted materially for us. It’s mostly that we are spending less marketing as a percentage of revenue, so we are trying to push the market less hard than we have in the past. Second, better competitive climate than last year, and then third we made a big investment with lower prices last year. Last Q3 we lowered our prices and you can think of lower prices as a marketing investment, although it’s not reflected in SAC. So those three factors have helped us to achieve this very efficient sub-$30 SAC.

And a follow up question about future ad spending:

Deborah Crawford

The next set of questions is from Doug Anmuth at Lehman Brothers -- with SAC at its lowest ever for Netflix as a public company, why not push the marketing a little further for more subs ahead of the back half?

Reed Hastings

Well, that’s an interesting question. It’s something we debate, which is the balance, really, of earnings versus growth and certainly there are good arguments that we could have taken, generated less earnings and pushed more into growth. But at the end of the day, we think it’s better to stick to our earnings targets, despite these great opportunities. And it does give us substantial room for growth, so I don’t feel like we’re making bad choices. But it is a very attractive opportunity when SAC is as low as it is.

The quotes are taken from the Netflix transcript which was published on Seeking Alpha a few hours after the call ended.

Also of interest -- here are all the transcripts from the Media sector, and more coverage of what's going on in the Internet advertising industry.