Rahul Sachitanand
Apr 20, 2022

As subscriber numbers crater, Netflix mulls cheaper advertising-driven plans

The video streamer's recent earnings show stress of growing competition, sharing of accounts, and geopolitical tensions.

Korean series Squid Game was among Netflix's most watched shows worldwide.
Korean series Squid Game was among Netflix's most watched shows worldwide.

After years of buccaneering growth, video streaming service Netflix has hit a rough patch and the company looks like it is pivoting its pioneering business model. Having lost users for the first time in over a decade, the firm’s chief executive Reed Hastings told analysts on a post-earnings call that the firm would consider introducing an advertising-led offering to reignite growth.

For the first quarter of its fiscal, Netflix lost 200,000 subscribers—compared to the 2.5 million it originally forecast to add in this period—as growing competition began to bite. This sluggish growth isn’t expected to improve anytime soon, as the company expects to lose as many as two million subscribers in the coming quarter. Netflix added four million subscribers in the corresponding period a year ago. 

“One way to increase the price spread is advertising on low-end plans and to have lower prices with advertising,” Hastings told analysts. “Allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now.”

He added that as “a consumer choice”, Netflix was trying to devise, over the next year or two, lower-priced offerings with advertising to make up the revenue plan from its cheaper rates.

Netflix stated in a letter to shareholders that sharing of accounts due to “high household penetration” and growing competition had created “revenue growth headwinds". In addition, the pandemic-driven boost to subscriber numbers seems to have faded, exposing Netflix to a time of sluggish growth.

“In addition to our 222 million paying households, we estimate that Netflix is being shared with over 100 million additional households,” the video streamer estimated. It may be noted that the firm has already moved to try to cut off this revenue loss. In March, it introduced two new paid sharing features, where users have the choice to pay for additional households. This was introduced in three markets in Latin America.

Overall, the decline in subscriber numbers saw Netflix’s user base fall to 221.6 million, down from 221.8 million in the previous quarter. However, Netflix claimed that the suspension of its service in Russia led to a loss of 700,000 subscribers and excluding this dent, it would have instead seen 500,000 net subscriber additions in the quarter.

In search of growth, Netflix said that international markets and content would continue to be key for the company. For example, three out of its six most popular TV seasons of all time are non-English language titles: Squid Game, La Casa de Papel Part 4 and All Of Us Are Dead. The company also noted its performance in APAC, where it was “seeing nice growth” markets including Japan, India, Philippines, Thailand and Taiwan.

For the record, Netflix reported first-quarter revenue growth of 10% to $7.87 billion year-on-year, even as operating profit fell by over 11% to $1.73 billion. In terms of its geographic performance, its largest market of US and Canada (what the firm terms UCAN), saw revenue increase to $3.35 billion from $3.17 billion year-on-year.

However, paid net additions were down for all regions except APAC where just over a million paid users signed up. APAC’s overall revenue was also the strongest, growing over 20% from $762 million to $917 million.

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