By Nagmani Sinha
Associate Vice President Analytics
Netflix Inc. (NASDAQ: NFLX), the American streaming giant lost its subscribers for the first time in Q1 and Q2 of 2022. Multiple factors that led to this massive decline in its subscriber base included price hikes in US & Canada, rising inflation, and even a loss of 700,000 users after the company pulled out of Russia after Russia invaded Ukraine. Netflix’s announcement of a crackdown on password sharing, which will make account-sharing users pay extra money seems to have demotivated its users to continue paying for the service. In addition, strong competition from rivals like Prime Video, Hulu, and HBO Max has eaten into Netflix’s market share, which was the biggest to begin with. Netflix has over 232 million users as of May 2023, however, we may see a decline in the growth of addition to these numbers in years to come. For instance, it added 36,753,000 users globally in 2020, which came down to the addition of only 8,903,000 users in 2022, and it even saw 919,000 subscribers canceling their subscriptions in US & Canada in 2022. (See the below chart)
After continuously growing for most of the last decade, Netflix is witnessing a decline in its revenue growth rate YoY. In 2022, the operating margins too, dipped to 18% after a steady growth from the past 5 years, after touching 21% in 2021, the highest in the last 5 years.
Netflix decided to tackle issues of stagnant growth in its revenue by implementing a couple of measures- a crackdown on password sharing and another, quite more important one, to offer an ad-supported basic plan. While the former one was delayed till Q2 of 2023, Netflix has introduced a new entry-level subscription plan which now will run ads while streaming content just like some of its rivals. It was launched in a total of 12 countries- Canada & Mexico (on November 1, 2022), Australia, Brazil, France, Germany, Italy, Japan, South Korea, UK & US (on November 3, 2022) and lastly in Spain (on November 10, 2022). Later in Q1 of 2023, the company the company reported an increase of 1,751,000 in the Paid Net Memberships throughout global markets. APAC region added the highest new members to the platform in Q1 followed by the EMEA region and US & Canada. The LATAM region, which includes Brazil where this new plan was rolled out, saw 450,000 members discontinuing their Netflix membership.
From the above data, it looks like Netflix’s new ad-supported tier has received a mixed response. However, the company states that it has impacted the top line of the company positively and the revenue in Q1 23 was up by 3.7% as compared to Q1 22. While the revenue growth was mostly due to the increase in subscribers, Netflix is confident that the ad-supported plan will drive in more revenue soon. It also announced that out of the total new subscribers joined since the roll-out of the ad-supported tier, 25% of them were on the new ad-supported tier and it currently has over 5 million subscribers in the same plan. This is a significant success for a company like Netflix which was laser-focused only on offering streaming services without any running ads in between. However, with steep competition from rivals, the company had to take steps to ensure revenue growth.
Netflix CEO, Reed Hastings admitted that “I didn’t believe in the ad-supported tactic for us. I was wrong about that. Hulu proved you could do that at scale and offer customers lower prices. We did switch on that,” Hastings also said, “I wish we had flipped a few years earlier on that, but we’ll catch up.” This sums up why Netflix pivoted from its legacy, of being a pure SVOD service provider.
As already mentioned, around 5 million people are already using the new ad-supported tier of Netflix which depicts the success of the move by Netflix to follow the path taken by its rivals. Subscribers on the ad-supported plan have access to 90% of the total titles Netflix has, which is not a deal breaker for the majority of users. In addition, the ad revenue offsets the cost of offering low-priced plans. Therefore, if Netflix decides to expand this new plan to more geographies, it will work in favor of the company. Think of lower-income markets as a huge user base that will jump on this plan if Netflix decides to launch a cheaper plan.
Some might point out that launching a cheaper plan will result in more users opting for it, who were initially paying for higher plans and generating higher revenue for the company. However, Executives at Netflix are completely cognizant of this possibility yet are bullish on the success of the new plan. And the Q1 2023 earnings of the company support their faith.
Moving forward, Netflix will also soon launch its crackdown on password sharing which, the company believes will negatively affect earnings in the short term. However, the company believes it will pan out positively in the long term.
With a new ad-supported plan at $6.99, Netflix has placed it at the right price point. This pricing is lower than its key rivals which offer similar streaming subscription plans. Hulu and Disney+ offer similar tiers at $7.99, while HBO Max’s similar plan costs $9.99. Thus, Netflix will be able to attract more users in the future to its new plan, given the breadth of its content.
Overall, Netflix seems to get it right with the introduction of a new ad-supported plan to arrest leaks in its subscriber base. Investors too, have gained confidence in it since Netflix announced the positive response to its new plan. The stock prices jumped 9% on the day Netflix revealed its new business model is paying off, and since has risen by 19%, as of mid-June 2023.
By Nagmani Sinha
Associate Vice President Analytics
Netflix Inc. (NASDAQ: NFLX), the American streaming giant lost its subscribers for the first time in Q1 and Q2 of 2022. Multiple factors that led to this massive decline in its subscriber base included price hikes in US & Canada, rising inflation, and even a loss of 700,000 users after the company pulled out of Russia after Russia invaded Ukraine. Netflix’s announcement of a crackdown on password sharing, which will make account-sharing users pay extra money seems to have demotivated its users to continue paying for the service. In addition, strong competition from rivals like Prime Video, Hulu, and HBO Max has eaten into Netflix’s market share, which was the biggest to begin with. Netflix has over 232 million users as of May 2023, however, we may see a decline in the growth of addition to these numbers in years to come. For instance, it added 36,753,000 users globally in 2020, which came down to the addition of only 8,903,000 users in 2022, and it even saw 919,000 subscribers canceling their subscriptions in US & Canada in 2022. (See the below chart)
After continuously growing for most of the last decade, Netflix is witnessing a decline in its revenue growth rate YoY. In 2022, the operating margins too, dipped to 18% after a steady growth from the past 5 years, after touching 21% in 2021, the highest in the last 5 years.
Netflix decided to tackle issues of stagnant growth in its revenue by implementing a couple of measures- a crackdown on password sharing and another, quite more important one, to offer an ad-supported basic plan. While the former one was delayed till Q2 of 2023, Netflix has introduced a new entry-level subscription plan which now will run ads while streaming content just like some of its rivals. It was launched in a total of 12 countries- Canada & Mexico (on November 1, 2022), Australia, Brazil, France, Germany, Italy, Japan, South Korea, UK & US (on November 3, 2022) and lastly in Spain (on November 10, 2022). Later in Q1 of 2023, the company the company reported an increase of 1,751,000 in the Paid Net Memberships throughout global markets. APAC region added the highest new members to the platform in Q1 followed by the EMEA region and US & Canada. The LATAM region, which includes Brazil where this new plan was rolled out, saw 450,000 members discontinuing their Netflix membership.
From the above data, it looks like Netflix’s new ad-supported tier has received a mixed response. However, the company states that it has impacted the top line of the company positively and the revenue in Q1 23 was up by 3.7% as compared to Q1 22. While the revenue growth was mostly due to the increase in subscribers, Netflix is confident that the ad-supported plan will drive in more revenue soon. It also announced that out of the total new subscribers joined since the roll-out of the ad-supported tier, 25% of them were on the new ad-supported tier and it currently has over 5 million subscribers in the same plan. This is a significant success for a company like Netflix which was laser-focused only on offering streaming services without any running ads in between. However, with steep competition from rivals, the company had to take steps to ensure revenue growth.
Netflix CEO, Reed Hastings admitted that “I didn’t believe in the ad-supported tactic for us. I was wrong about that. Hulu proved you could do that at scale and offer customers lower prices. We did switch on that,” Hastings also said, “I wish we had flipped a few years earlier on that, but we’ll catch up.” This sums up why Netflix pivoted from its legacy, of being a pure SVOD service provider.
As already mentioned, around 5 million people are already using the new ad-supported tier of Netflix which depicts the success of the move by Netflix to follow the path taken by its rivals. Subscribers on the ad-supported plan have access to 90% of the total titles Netflix has, which is not a deal breaker for the majority of users. In addition, the ad revenue offsets the cost of offering low-priced plans. Therefore, if Netflix decides to expand this new plan to more geographies, it will work in favor of the company. Think of lower-income markets as a huge user base that will jump on this plan if Netflix decides to launch a cheaper plan.
Some might point out that launching a cheaper plan will result in more users opting for it, who were initially paying for higher plans and generating higher revenue for the company. However, Executives at Netflix are completely cognizant of this possibility yet are bullish on the success of the new plan. And the Q1 2023 earnings of the company support their faith.
Moving forward, Netflix will also soon launch its crackdown on password sharing which, the company believes will negatively affect earnings in the short term. However, the company believes it will pan out positively in the long term.
With a new ad-supported plan at $6.99, Netflix has placed it at the right price point. This pricing is lower than its key rivals which offer similar streaming subscription plans. Hulu and Disney+ offer similar tiers at $7.99, while HBO Max’s similar plan costs $9.99. Thus, Netflix will be able to attract more users in the future to its new plan, given the breadth of its content.
Overall, Netflix seems to get it right with the introduction of a new ad-supported plan to arrest leaks in its subscriber base. Investors too, have gained confidence in it since Netflix announced the positive response to its new plan. The stock prices jumped 9% on the day Netflix revealed its new business model is paying off, and since has risen by 19%, as of mid-June 2023.
