Why 'cable isn't dead yet,' analyst explains

Jason Helfstein, Oppenheimer Managing Director — Head of Internet Research, sits down with Yahoo Finance Live to talk about Netflix's stock upgrade to an Outperform rating, the streaming platform's ad-tier subscription model, the outlook in the streaming landscape, and competing with cable.

Video transcript

- Netflix on the move today, not too far from the flatline, just barely in positive territory, giving back some of its earlier gains on the move today on the heels of a note from Oppenheimer telling investors, it's time to be bullish on the streaming giant. Joining us now is one of the authors of that note.

We want to bring in Jason Helfstein. He's Oppenheimer's Head of Internet Research. Jason, it's great to have you. So you're assuming coverage of Netflix with an outperform rating, $325 price target. Taking a look at why you're so bullish on the name, you did a deep dive into Netflix's ad opportunity. What are you seeing that others are missing?

JASON HELFSTEIN: So first of all, it's early. As far as we can tell, less than 5 of the something like 50 covering analysts have actually put advertising in their model. It does require some kind of guesswork and analysis. But it is the story of the company. And I just think just people haven't done it yet. So that would be number one.

Number two, we did a survey of about 500 Americans. And what we found was that amongst the 15% of subscribers who turned off Netflix, 43% said they would come back at a lower price, meaning ad supported tier. And all of the 9% who never subscribed, 30% would do so. So I think it actually means you can find more engagement in the platform with the advertising.

- And how about existing subscribers? As part of that survey, did you get a sense that x percent will actually trade down to the ad supported tier just because they want to save a few bucks. And how does that impact the stock?

JASON HELFSTEIN: We did. I mean, something like 70% of the basic. I mean, you also have standard and premium. And as you moved up that, the percentage saying they would downgrade would be lower. You got to remember a few things. First of all, there's what people say they'll do and they'll actually do. So if people say 70%, and you factor in laziness and other factors, it probably won't be 70%.

But in our model, we did assume a pretty significant of people downgrade. But that is the point. We think the advertising opportunity is to be able to bring a large number of people all at once. So if you look at why do advertisers pay such high rates for the Academy Awards, for the Super Bowl, for sports finals, even for, like, Sunday football, it's because of the ability to aggregate so many people all at once, which is important when you're launching a product.

And if you think about what Netflix can do, they actually have the ability to time the launches of shows that's in the best interest of their top advertisers. And I just I don't think anyone's talking about this yet. There was some press reports about leaked memos and presentations that perhaps Netflix was trying to get to agencies. But I think this is pretty unique in the scope of advertising, which in itself is a pretty mature industry.

- So how much would you say is actually riding on this ad tier succeeding when it comes to when you look at what other streamers are doing in this space?

JASON HELFSTEIN: I mean, it's very significant. So if you think about what happened to Netflix, so the number of subscription video on demand, SVOD, providers tripled over the last few years, all of them coming in at a lower monthly price. And consumers were able to find new shows for less money.

So if you think about what HBO used to be, it used to be the most expensive service, the least shows. Netflix kind of evolved into that relative to some of the new competition. And look, not to say people wouldn't use it, but you have people go on. They binge a show. They turn it off. So the key to getting people to be less likely to turn it off is price.

And so by bringing advertising, it effectively allows you to expand the market to more consumers and lower the price. And because of the breadth of content that they have, I actually think once a subscriber joins, they're more likely to stay on Netflix than they are on another service because while, again, other services that may have been $5 a month, like Apple plus, may have gotten people's attention with some of the original content, they don't have nearly the depth of content that Netflix has.

So it's almost like hitting reset. Like, if they could bring this out-- and again, we don't know exactly what the monthly price will be. But if they can bring it out at $4.99 for the ad tier, we think that's going to help the business in a lot of fronts.

- Jason what about the timing of it, the timeline that they're planning to launch this? So Netflix moving it up. They're now planning to launch this in November ahead of Disney plus's add tier supported version in December. Does that give them a significant advantage here just from an analyst perspective?

JASON HELFSTEIN: I don't think so. I mean, look, the sooner you can launch this, the sooner you can get the kinks out. This is not easy. And they're working with a significant partner in Microsoft to-- while they have an ad business, this is a pretty significant endeavor for Microsoft to pull off, both on a technical and sales aspect.

So again, I think the sooner you get this out and the sooner you can start to get advertisers to look at this as a real alternative-- also you have to remember, advertisers plan pretty far ahead. A lot of advertisers plan on an annual basis, some on a calendar year, some on kind of like the school year or the TV season.

And so the sooner you can put that out there, the sooner you can start to have conversations about, how can I become a meaningful of your ad mix? How should we think about your product launch schedule relative to when we can bring you the most audience? So I just think it's the sooner the better. But investors should expect there will be some growing pains when you launch this.

- And if you are bullish on the ad revenue there at Netflix, what about Meta? You also cover Meta. And it seems like competition is far greater than what we realized maybe six months, a year ago. What are your thoughts on the environment for Meta's ad sales?

JASON HELFSTEIN: So I mean, kind of a different advertiser base. Meta is much more shopping, e-commerce driven. As far as retail sales, they're still holding up shockingly well. A lot of it's inflation. So on a real basis, you're really not seeing much growth. But advertising is usually 8% of revenue. So I think the big question is just how much we do see a slowdown in consumer spending, particularly as we get to the holidays.

For Meta, look, they were the first to be hurt by the Apple privacy changes. And so that should start to relieve itself. We actually think that the newest update from Apple called SKAdNetwork 4.0 should actually allow Facebook, Meta, Instagram to improve the ad targeting attribution but hasn't gone live yet. And we're kind of waiting for feedback from advertisers and agencies as to kind of when that is.

So I think it's early, but there are reasons to be optimistic for Meta, specifically when acknowledging that overall consumer spending may slow from here, as interest rates continue to go up, which would impact the whole advertising sector broadly.

- And Jason, just quickly, as you look at some of the ad spend, obviously this is happening at a time where we're seeing a lot of bundling happening as well. How does that play into the mix?

JASON HELFSTEIN: So when we talk about bundling and streaming services, I mean, there's no question that there's just a lot of choice to investors-- or viewers-- a lot of choice to investors too. And you can turn a service on. You can then turn it off.

And if you look at what has made historically cable a great business is people just turned it on and left it. And that was largely because you had to give equipment back. It wasn't easy. There were reasons why you just didn't turn it on, turn it off, whereas with streaming services, it's super easy to turn them on and turn them off.

So look, I do think you are seeing the media companies looking at consolidating their streaming offerings. I think Paramount is thinking about combining CBS into Paramount Plus. I mean, the fewer-- if you think about from a marketing efficiency, in a way, the less brands you have to market, the more efficient it is.

And consumers, I think, do think about the number of these kind of bundles they pay for. And then, look, and then over time, as you start to see just the standardization of streaming platform, so Roku has a streaming platform. Amazon has a streaming platform. Apple has a streaming platform. Does it make sense for the content providers to kind of work with those to kind of offer bundles through each of the platforms, which is kind of like a cable replacement?

So cable is not dead yet. I think people, analysts, investors, the writing is on the wall that some time in the future, we won't have cable boxes anymore. And everything will be streaming. But people are still paying their cable. And so it just takes a very long time to evolve it. But I think you will see consolidation in offerings by media companies just because it's just going to be more efficient for them from a cost saving standpoint.

- It does seem like we're kind of coming full circle when it comes to cable and bundling. Thank you for your insights and for joining us this afternoon. Jason Helfstein, thank you so much.