Can advertising reverse Netflix’s growth slowdown?
Losing subscribers for the first time in a decade and intense competition from other streaming platforms seem to add pressure on the company to adjust its business model.
Netflix said this week that it’s contemplating to offer a lower-priced version of its service that has advertising, in an attempt to reverse the slowdown in its membership growth and expand its subscriber base.
The company, however, did not provide additional details such as how much a cheaper ad-supported service would cost.
The announcement came after the platform, the world’s largest video streaming service, lost 200,000 subscribers in the first quarter, the first such decline in a decade.
The US company, which expects to lose a further 2 million customers this quarter, blamed its poor performance on increasing competition and saturation in its leading markets, the problem of password sharing among its subscribers as well as the global economic slowdown and the effects of the war in Ukraine.
A reversal in fortunes
The loss of customers marks a reversal in the platform’s fortunes, which saw a record jump in subscriptions over the last couple of years when the COVID pandemic forced governments around the world to impose lockdowns and confine people to homes to curb the spread of the coronavirus.
Netflix shares plunged over 35% on Wednesday after the revelation, losing tens of billions of dollars in market value.
“The decline in subscribers coupled with guidance for an even greater decline is likely to keep optimists away until there is some evidence that subscribers will once again grow,” Wedbush analyst Michael Pachter wrote in a research note shared with DW.
“Should Netflix roll out an ad-supported tier, the stock will likely respond favorably, but we expect management to test the concept for at least several quarters before announcing a major change,” he added.
Advertising will mark a big change for Netflix
Netflix, which originally began as a DVD-by-mail service, has grown into one of the dominant video streaming services in the world over the past decade, boasting more than 220 million customers globally.
The platform, which has so far been a subscription service, has offered its movies and TV shows without commercials.
When previously asked about Netflix’s decision to be ad-free, the company’s co-founder and co-CEO, Reed Hastings, said it isn’t a “philosophical thing” and that it’s “what we think is the best capitalism.”
However, slowing subscriber growth and intense competition from other streaming platforms seem to force the company’s leadership to rethink their strategy.
During an earnings call on Tuesday, Hastings said that the company was “quite open to offering even lower prices with advertising, as a consumer choice.”
Hastings noted that an ad-supported tier “makes a lot of sense” for consumers who would “rather pay a lower price” and are “ad-tolerant.”
Some Netflix’s competitors like HBO Max and Hulu already offer ad-supported and cheaper subscription tiers.
Password sharing and market saturation
In addition to allowing ads on its platform, the company said it will clamp down on password sharing to boost its subscriber numbers and revenues.
Netflix estimates there are over 100 million people viewing the service without paying for it. “We’ve just got to get paid at some degree for them,” Hastings said.
The company is currently running a program in Chile, Costa Rica and Peru aimed at curbing account sharing and making more people pay for accessing the content.
In these Latin American countries, subscribers can share accounts with another household for a discounted price.
A big challenge facing the company is saturation in its leading North American market, including the United States and Canada.
“There are around 140 million households in the US and Canada, and at 75 million subscribers, Netflix has penetrated over half of them,” Pachter pointed out.
“The company’s estimate that 30 million households use passwords they don’t pay for sounds a bit high, as it would bring Netflix’s household penetration to 75%; we find it inconceivable that the company will ever fully penetrate the 87% of households with broadband,” he added.
The thing that ails Netflix the most is saturation in the US market, Alan Gould, an analyst at Loop Capital Markets, told CNBC, adding: “With password sharing, they’re probably close to 85-90% of the market right now.”
Uncertain economy hampers growth prospects
To keep growing, Netflix will have to find more subscribers in places like Latin America, Africa or India, the world’s second-most populous country where video streaming channels have seen considerable growth over the past two years.
The biggest change these platforms have brought to the South Asian country is providing viewers with access to content from all over the world, film exhibitor Akshaye Rathi told DW in February.
“We are witnessing some phenomenal content from Israel, Spain, Korea and various parts of the world. That gives exposure to the audience and changes the kind of expectations that they have for their entertainment,” she said.
Despite their promise and attraction, markets like India remain challenging for Netflix to penetrate widely.
In India, for instance, the wide range of streaming content now available — the country has over 40 streaming platforms — has made the sector more competitive.
In December, Netflix slashed its prices in the country dramatically to attract price-sensitive Indian customers, cutting its pricing for the mobile-only plan from 199 rupees (€2.4, $2.6) to 149 rupees per month.
To expand its user base outside its leading markets, the platform is also increasingly pouring money into producing local language content.
Nevertheless, the efforts to boost its subscriber base are being hampered by an uncertain global economy and soaring inflation across the world.
“With inflation taking hold, people are starting to watch their pennies,” analyst Rob Enderle of Enderle Group told the AFP news agency. “You get a situation where people are thinking through the subscriptions they have and the subscriptions that they keep.”
Edited by: Uwe Hessler