After stock shock, Netflix looks to advertising

Future. After reporting its first subscriber loss in a decade, Netflix announced that it plans to offer an ad-supported tier in the near future — hoping the lower price point will kickstart growth worldwide. But with Netflix already the clear market leader at nearly 222 million subscribers, the disappointing quarterly report (to investors) may be a canary in the coal mine that there is a ceiling to streaming success.

Are you still watching now?
Coming just weeks after CFO Spencer Neumann hinted at the possibility, Netflix plans to program the one thing they never wanted to do before — ads.

• Per Deadline, Co-CEO Reed Hastings announced in the company’s Q1 earnings call that the platform would offer a lower-priced, ad-supported tier or tiers in the “next year or two.”
• While Hastings has been against ads in the past because of the “simplicity of subscription,” he relented that he now has to bend to “consumer choice.”
  • For example, roughly 88% of Hulu subscribers are on the ad-supported tier, which generates $3 billion in revenue for the company.
• Additionally, Netflix no longer has to worry about the complexity of ad tech, allowing the company to act simply as a publisher while third parties handle the nuts and bolts.

And in a sign of the times, Disney recently announced that it too would bring ads to Disney+… despite also commanding the same sky-high subscriber forecasts that Netflix had in the past few years.

Netflix and not so chill
So, why is Netflix finally biting the advertising bullet? Subscriber growth has stalled in every market but Asia, leading to a net-subscriber loss of 200,000 users. While this quarter’s loss can be attributed to the platform dipping out of Russia (where it had 700,000 subscribers) in protest against the invasion of Ukraine, the company also expects to lose another 2 million next quarter. Wall Street didn’t like that.

Netflix hopes that by adding a lower-priced ad plan, it can recapture subscribers who churned, capture new subscribers looking for a deal, and convert users who are using someone’s account for free.

But a big question remains: by offering an ad-supported tier, how many subscribers paying the premium price will also transition? And how will that affect Netflix’s overall revenue? The streamer may not have those answers yet, but it’s aware of the pitfalls. So, Neumann also announced that it’s “pulling back” on some content spend — and probably its top-of-the-market salaries — to “reflect the realities of the revenue growth of the business.”