Welcome back to What I’m Hearing+, live from Brooklyn for the next few days before I’m off to San Francisco. (I’ll have some time to see folks if you’re interested in grabbing a coffee!)

This week, a note on Netflix’s upcoming Q3 earnings and the hard questions surrounding its ad business—a leading indicator for Wall Street as the streamer transitions from the subscription pure play era to a model that looks a lot like… traditional TV.

But then it turned out that Netflix’s TAM wasn’t quite as large as once anticipated (or fantasized about, really) and the market punished the company for a multitude of previously overlooked sins: overpaying for celebrity showrunners rather than more retentive CSI fare, being lenient on password-sharing, and thumbing its nose at advertising. The Great Streaming Correction was a sign that post-ZIRP Wall Street cared less about subscribers than monetization. Netflix got the message and, soon thereafter, dug in on a new advertising strategy.

Now, that fledgling strategy is already under the microscope. Amid reports that its ad business is underperforming, Netflix stock is down nearly 10 percent in the past month. Jeremi Gorman, a highly touted ads-chief poached from Snap, has left the company. Co-C.E.O. Ted Sarandos acknowledged last week that the offering is “definitely not at the scale that we want it to be,” and multiple analysts have cut their price targets for the stock ahead of the earnings report on Wednesday.

But it’s not all bad news. While Netflix’s ad revenue wasn’t “material” last quarter, according to the company, it is anticipating “steady growth” as customers respond to rising prices on the higher tier and new account-sharing rules by opting into the cheaper, ad-supported tier. Third party data also confirms that the ad business is moving in the right direction: the “standard with ads” plan was responsible for between 28 and 30 percent of all new signups last quarter, according to Antenna. And overall revenue should continue to grow as more customers shift toward the cheaper ads tier, which actually generates more ARPU, even in this soft advertising market.

Indeed, streaming is only at the beginning of an industry-wide shift back toward a viewing experience that is more like traditional TV, and it will take some time for consumers to unlearn certain expectations (like the fact that good entertainment is expensive). And the potential market is huge. Nearly 50 percent of customers surveyed would happily switch to an ad-supported tier if it saved them between $4 and $5 a month, according to a report from Hub Entertainment Research published last December. To wit: more than 65 percent of consumers are already engaged with some form of FAST (free ad-supported TV) platform, according to the same study.

Netflix is positioned to hoover up a good portion of this market. MoffettNathanson is estimating that of the subscribers who may churn from the basic non-ad tier as it goes away, approximately 926,000 customers would re-sign up to the standard-with-ads tier over the next 16 quarters. The firm added in its report on Netflix’s ad business, published last quarter, that “Netflix will reach 5.5 million UCAN ad-tier subscribers by year-end 2023 and 17.1 million by the end of 2025.”

But Netflix has work to do to get there. And the company’s next moves will likely depend in part on how the broader streaming industry evolves: how customers adapt to economic nudges designed to differentiate its premium tier, and how Netflix’s chief rivals—especially Disney+, Amazon Prime Video, and Max—respond.

By contrast, Disney+ and Amazon are opting out. They’re effectively switching the core foundational base to an ad-supported tier, making more money per set of eyeballs but not creating a “new” offering that’s cheaper than the current version. If a segment of those customers want to avoid ads, they can pay more, also increasing the ARPU for those potential customers, but the largest sector of customers are monetized at a stronger rate.

On some level, each strategy seems germane to the streamers employing them. Estimates suggest Netflix currently has about 68 million customers in the U.S., the vast majority of which are not in the ad-supported tier. For Netflix, which is drawing ARPU of $16 per subscriber per month, the objective is to continue scaling the platform while maintaining high levels of per-member revenue. Netflix, with its $5 billion in projected free cash flow, is less focused on further monetizing its customer base than in accumulating additional scale (and revenue) from the customers that it’s missing out on.

Disney+, with its 46 million domestic subscribers, has other headaches. Disney, which vastly underpriced its streaming product, perhaps as a way to juice early subscription numbers and satisfy Wall Street (back in the old days), needs to squeeze more revenue from its existing members. Disney+ only draws $7.31 per customer, and its growth is also plateauing domestically. Therefore, it’s leaning into a strategy focused on that base. If the number of Disney+ subs remains relatively constant—a big if, but Disney is a pretty sticky service—then swapping the vast majority to an ad-supported tier that increases ARPU is a smart strategy. Super users who don’t want advertising can always pay the higher fee.

Internationally, a basic ad-supported tier is also a useful tool for penetrating emerging regions, where customers are more cost-conscious and less experienced with streaming. This is key for Netflix, in particular, which will use lower priced tiers to scale in these countries, while securing high ARPU from its ad-free platform in less cost-conscious territories.

Netflix is still setting its advertising strategy, as the company’s V.P. of global ad sales, Peter Naylor, noted during an Ad Week conference on Tuesday, as reported by The Hollywood Reporter. New innovations include finding series brand partners who will sponsor an entire season (like Frito Lay’s Smartfood and the upcoming Love is Blind season) or creating a “Binge” initiative that will allow customers to watch an episode of a show ad-free if they’ve watched multiple episodes of said series in a row on the ad-supported tier. To do so, however, they will have to sit through a commercial.

What Netflix’s newly vocalized strategy really seems to emphasize is quality over quantity; if Netflix can’t promise the reach of its entire audience, which is what advertisers are really looking for on top of being included within Netflix programming, Netflix can provide top billing. This is crucial: the strongest impact alongside reach in the digital video world is YouTube, where many of these advertisers are also spending chunks of cash. Most people on YouTube watch videos with ads, but the viewing experience was always designed around ads and the content is arguably reflective of the price point. In the streaming world, series like Love is Blind, which Nielsen declared the eighth most viewed streaming original in 2022, can be more impactful for advertisers looking to spend big than paying to be attached to the platform where it’s harder to determine total reach.

Looking out, though, it will be interesting to see how much of the audience Netflix is ultimately able to deliver on its platform. Even with the continued growth of its ad tier—and let’s be clear, we are in the early stages—Antenna estimates that about 5.75 percent of all Netflix subscribers are seeing ads. Netflix was reportedly charging about $65 CPM fees when the ad-tier launched. But if the reach isn’t there, some advertisers will wonder why they’re paying double Hulu’s rate card.

Balancing all these sides of the equation will determine the true size of the opportunity. Do people want ads? No. Do people want Netflix series? It’s competitive out there, but yes. Netflix is currently working to widen the delta between the ad-free premium package and the cheaper, ad-supported tier to force customers to choose. Continuously differentiating the tiers, and adding more value to the pure play option (fitness content, video games, etcetera) will remain key.

Netflix is a no-brainer for most entertainment enthusiasts with disposable income. But Netflix executives are still betting that the cheaper ad-supported tier will create significant revenue as it continues to scale, particularly outside the U.S. and Canada. The question is whether Netflix gets its advertising tier to take off before the increased price hikes scare away customers who can find other entertainment elsewhere.