Netflix's Ad Business: Assessing the Path to Market Dominance

Netflix's advertising business is no longer a side project; it's the fastest-growing engine in its model, with a path to market dominance. The addressable market is expanding rapidly, and the company's execution is turning that growth into a scalable, high-margin revenue stream.

The core of the thesis is adoption acceleration. In the 20 key markets tracked by Digital i, the share of Netflix's active accounts using its ad-supported tier has surged to 40%, up from just 26% a year ago. That represents a 14% year-over-year growth in ad-tier subscribers, the highest rate among global streamers. This isn't just incremental growth; it's a fundamental shift in user behavior, with Netflix now capturing the largest share of the ad-tier adoption wave. The company is on track to double its ad revenue in 2025, a target that implies a massive leap from its already strong position.

What makes this growth so compelling is its profitability. Unlike traditional ad-supported models that can be margin-squeezing, Netflix's approach is demonstrating exceptional scalability. The business is already a major contributor to the company's financial strength, with operating margins expanding to 34.1% in the second quarter. This high-margin nature means each new ad-tier subscriber adds significant profit, fueling the capital needed for content and technology investments. The setup is clear: a large and accelerating TAM, captured by a business model that turns viewers into high-value revenue.

The bottom line is that Netflix is positioning itself to become the primary revenue driver by 2026. With ad revenue on track to nearly double this year and margins expanding, the company is building a powerful, self-reinforcing cycle. More users adopt the cheaper tier, driving ad sales and profits, which fund more content and better targeting, attracting even more users. For a growth investor, this is the blueprint for market dominance.

Wedbush's 2026 Projection: Rationale and Key Drivers

Wedbush's bullish forecast for Netflix's ad business is not a leap of faith. It is a direct extrapolation from the company's demonstrated execution and strategic moves, with a clear path to market dominance by 2026. The firm's core thesis hinges on one critical condition: Netflix must successfully double its ad revenue in 2025. This target is not arbitrary; it is the linchpin that transforms the ad tier from a growing segment into the company's primary revenue driver.

The rationale is supported by strong, recent momentum. Netflix itself has called its third-quarter ad sales its strongest quarter yet, a clear signal that the business is accelerating. This performance aligns with Wedbush's view that the advertising engine is beginning to hum. More importantly, management's confidence is reflected in its actions. The company recently raised its full-year revenue guidance, a move that signals sustained growth momentum and validates the underlying business strength needed to hit the doubling target.

A key strategic driver is the new partnership with Amazon Ads, announced to launch in the fourth quarter. This integration provides advertisers using Amazon's demand-side platform direct access to Netflix's premium inventory. For Netflix, this partnership is about efficiency and scale. It leverages Amazon's sophisticated ad tech and clean-room capabilities to increase efficiency and improve performance for advertisers, making Netflix's ad inventory more attractive and easier to buy. This expands the sales channel and enhances the platform's value proposition, directly supporting the aggressive growth trajectory.

Viewed together, these elements create a self-reinforcing cycle. Strong Q3 results prove the model works. The Amazon partnership removes friction for buyers, boosting inventory utilization. Management's raised guidance confirms the company is on track to double ad revenue this year. If achieved, this doubling would propel ad revenue to a level where, for the first time, it could surpass the company's core subscription revenue. That milestone, Wedbush argues, is the foundation for 2026 dominance. The setup is now in place for the ad business to not just grow, but to lead.

Competitive Landscape and Growth Challenges

Netflix's path to ad-tier dominance is clear, but the competitive landscape presents a formidable benchmark. The company's recent 14% year-over-year growth in ad-tier adoption is impressive, yet it still trails far behind the leader. According to Digital i research, Prime Video remains the service with the highest overall proportion of ad-tier usage, at 82%. This isn't a recent development; Amazon made a strategic decision to migrate all subscribers to the ad-supported tier starting in January 2024, creating a massive, captive audience. While Prime Video's share has dipped slightly from 88%, it still represents a significant competitive moat that Netflix must overcome.

The key challenge now is scaling beyond the initial, price-sensitive cohort. Netflix's growth from 26% to 40% of active accounts in 20 key markets shows strong adoption, but the company is still third behind Disney+ (44%) and well behind Amazon. This suggests the most eager users have already signed up. The next phase of growth requires convincing a broader, less ad-tolerant audience to switch-a-harder sell that demands more compelling value propositions from both Netflix and its advertisers. The company must demonstrate that its premium content library and engaged user base can deliver results that justify ad spend, moving beyond the early adopters.

Strategic partnerships are critical for this scaling effort. The recently announced integration with Amazon DSP, launching in the fourth quarter, is a direct response to this challenge. By giving Amazon's advertisers direct access to Netflix's inventory, the deal aims to increase efficiency and improve performance for buyers. This leverages Amazon's sophisticated ad tech and clean-room capabilities, making it easier for large advertisers to buy into Netflix's platform. For Netflix, this partnership is about expanding its sales channel and tapping into a much larger pool of advertiser demand, which is essential for driving the revenue growth needed to close the gap with Prime Video and achieve market leadership.

Catalysts, Risks, and What to Watch

The path to dominance hinges on a few clear milestones. The primary catalyst is hitting the "double ad revenues in 2025" target. This is the linchpin that transforms the ad tier from a high-growth segment into the company's primary revenue driver. The first major test arrives with the fourth-quarter earnings report and the full-year 2025 guidance. If Netflix can demonstrate that its strongest quarter yet for ad sales is sustainable, it will validate the entire growth thesis. Any deviation from the doubling target would be a major red flag, likely challenging the Wedbush projection that ad revenue will surpass core subscriptions by 2026.

A key near-term watchpoint is the launch and early performance of the Amazon Ads partnership. This integration, becoming available in Q4 2025, is designed to increase efficiency and improve performance for advertisers. Investors should monitor whether this partnership leads to a measurable acceleration in ad sales velocity and higher average revenue per ad impression. Success here would signal that Netflix is effectively leveraging external ad tech to scale its sales force and attract larger, more sophisticated buyers, directly supporting the aggressive growth trajectory.

The main risk to the thesis is a slowdown in ad-tier adoption growth. The company has already captured the most eager, price-sensitive users, with its share of active accounts on the ad-supported tier now at 40%. As the pool of early adopters shrinks, further penetration will require more compelling value propositions. The risk is that growth decelerates, forcing Netflix to rely more heavily on price increases or content investments to drive ad revenue, which could pressure margins. The company's ability to innovate-through live events, enhanced targeting, and new partnerships-will be critical to reigniting adoption beyond this initial cohort.

For a growth investor, the setup is now about execution against these specific catalysts. The doubling target and the Amazon partnership are concrete milestones. The risk of a growth inflection point is real but manageable if Netflix continues to execute. The coming quarters will provide the evidence to confirm whether the ad business is on track for market dominance or if it faces the friction of scaling a mature product.