Netflix bets big on AI tools to enhance production and personalization

Netflix is going all in on AI, turning its Q3 earnings report into an admission that the future of streaming and filmmaking is now powered by machines.

The company said on Tuesday that generative AI will now be a core part of how it operates, from helping directors build scenes to improving how users discover content.

But Netflix’s earnings report was disappointing revenue-wise, which the streamer blamed a Brazilian tax dispute for, but it didn’t stop its stock from crashing by 7% in extended trading, according to data from CNBC.

Netflix said that the setback came from a 10% tax on payments made by Brazilian entities to operations outside the country, a hit it hadn’t expected in forecasts. Executives said it was added to the third quarter after it became “reasonably likely” Netflix would lose a legal fight over the issue.

Chief Financial Officer Spence Neumann told investors that it wasn’t a tax unique to Netflix or even to streaming, and that without it, the company would have exceeded its operating income and margin targets.

Netflix deepens AI integration across production and user experience

Netflix’s shareholder letter said machine learning and AI have long powered its recommendation systems, promotional tools, and production pipelines.

But this time, executives called generative AI a “significant opportunity” to reshape everything from ad personalization to film production. “We’re empowering creators with a broad set of GenAI tools to help them achieve their visions and deliver even more impactful titles for members,” the company said.

Netflix shared examples from recent projects. The new film Happy Gilmore 2 used AI to de-age characters, while the upcoming series Billionaires’ Bunker used AI in pre-production to design wardrobes and sets.

During the earnings call, CEO Ted Sarandos said AI will help creators “tell stories better, faster and in new ways,” though it “can’t automatically make you a great storyteller if you’re not.”

Sarandos stressed that the company isn’t worried about AI replacing creativity, saying the focus is on using technology to improve both the artistic process and the viewer experience.

An upstart production studio called Particle6 recently faced massive backlash for its plan to create, design, manage and monetize AI-generated actors and talent, including from the media union SAG-AFTRA.

Netflix adjusts earnings forecast and ad revenue outlook

Revenue for the quarter ending September 30 reached $11.51 billion, up 17% year over year and matching analyst estimates. Earnings per share landed at $5.87, missing the expected $6.97, while net income rose to $2.55 billion from $2.36 billion a year earlier.

For the full year, Netflix projected $45.1 billion in revenue, a 16% increase from 2024. But it cut its operating margin forecast to 29%, down from 30%, due to the Brazilian tax impact.

Still, Netflix called the quarter its best ever for ad sales, with co-CEO Greg Peters saying ad revenue is on track to more than double this year.

“Netflix had its best ad sales quarter to date, but still did not provide a figure for how large the ad business is,” said Ross Benes, senior analyst at eMarketer. He added that most growth still seems to come from subscriptions, not ads.

The company also reminded investors that it raised subscription prices in January, including its ad-supported tier, a move that helped offset global production costs and fund new AI tools.

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