Netflix shares soared on Friday after its third-quarter earnings surpassed analyst expectations and advertising tiers continue to propel growth. Thursday’s earnings call also revealed why Canada is key to the streaming giants’ ad ambitions. 

The numbers: 

• Netflix added five million new streaming subscribers in the third quarter. 
• It beat average analyst expectations on earnings and revenue, sending shares up over 10 per cent.
• Third-quarter revenue rose 15 per cent year-over-year for the third quarter in a row.
• Though the company didn’t break out how much it earned from advertising, it said its ads membership increased 35 per cent quarter-over-quarter.  

Two steps forward, one step back: When Netflix made its first foray into the streaming market, it tried to entice initial subscribers with an ad-free, ultimate-choice experience. 

Two years ago, it pushed into advertising. Reed Hastings and Ted Sarandos, its co-CEOs at the time, rolled out ads and introduced new lower priced subscriptions. The new tier has helped it acquire new customers and pump up profits, Netflix said in a note to investors on Thursday. 

Over half of Netflix’s new sign-ups in countries offering ad tiers were for an ad-based subscription, the company wrote to shareholders.

“This approach has the potential to lower subscription fees while also creating a more robust revenue stream for Netflix,” Shamel Addas, associate professor of digital technology at Queen’s told The Logic in an email.

Using Canada to ‘fine-tune’ the ad experience: After getting advertisers through the door, Netflix is now trying to improve viewers’ experience. And it’s experimenting with Canada’s advertisers first. 

The US$327-billion company plans to hand Canadian advertisers the reins to manage their own content on Netflix by the end of the year, before rolling it out in other markets. Netflix’s in-house ad server will give advertisers more insights and ways to measure their impact, advertising president Amy Reinhard first announced at the company’s Upfront presentation in May.

“[Advertisers] want to be close to the stories that people are watching, the stories that people are talking about, the events that people are gathering to be part of,” co-CEO Sarandos said in a call with investors Thursday.

The strategy will allow Netflix to use data it already collects to give advertisers a targeted approach, Addas wrote. And, it will be able to protect user data more effectively by keeping it “within its ecosystem,” he added.

“Canada has a manageable market size, high adoption of streaming content, a diverse culture, and a tech-savvy population of users,” Addas wrote. “It can allow [Netflix] to fine-tune its ad platform before expanding globally in 2025.”