Netflix put an end to the subscriber losing streak in Q3 after gaining 2.4 M new subscribers. Reed Hastings Co-Founder and Co-CEO said, “Thank God, we’re done with shrinking quarters. That’s a big feeling of — we’re back to the positivity.”
Why it matters: The streaming giant had a rough patch in 2022 but rebounds in the third quarter with ad-supported tailwinds.
Quick Recap: Over the years, Netflix pitched for the ad-free model so the creators can focus on content than monetization. However, it reshaped its ad business with AVOD services to deal with losses and contribute to its growth. The company has witnessed gains after unveiling its Basic Ad plan in 12 countries, starting from Nov 3 in the U.S.
Details: In an investor call, the company said they are focused on new revenue streams, be it -the content side, advertising, or paid sharing and so they will no longer provide guidance on subscribers.
It is forecast to add 4.5 million subscribers next quarter, a bullish estimate considering it lost over 1 million subscribers in the first half of the year. The company touted newer hits, such as “Monster: The Jeffrey Dahmer Story,” and season 4 of “Stranger Things” that helped to move the needle last quarter.
By Numbers: CNBC reported the following financial numbers:
Revenue: $7.93 billion vs $7.837 billion, according to Refinitiv survey.
Expected global paid net subscribers: Addition of 2.41 million subscribers vs. addition of 1.09 million subscribers, according to StreetAccount estimates.
Will Ads add to the Growth?
The streamer said it was “very optimistic” about its new advertising business. COO Greg Peters anticipates sign-ups for Netflix Basic with Ads will add net new subscribers rather than existing subscribers switching off from current plans.
“We don’t expect a material contribution in Q4’22 as we’re launching our Basic with Ads plan intra-quarter and anticipate growing our membership in that plan gradually over time. Our aim is to give our prospective new members more choice – not switch members off their current plans. Members who don’t want to change will remain on their current plan, without ads, at the current price.”
Subscription growth is forecasted based on its upcoming content slate and the typical seasonality that occurs during the last three months of the year. With a lower price, a business will have a balance between monetizing with ads and providing access to all their great content.
Netflix is in a highly competitive industry with viewers having a vast choice- from linear TV to streaming, YouTube to TikTok, and gaming to social media. Netflix noted its competitive advantage in a note to investors, saying:
“Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 to $6 billion annual operating profit.”
The streaming war is real. Streaming subscribers are not churning away because they are switching to other providers, not stopping streaming. The streaming industry is more competitive and ad-supported than ever before, but it still has the potential to evolve. Reeds explained that Netflix and Disney are two big brands in the premium space. And they are battling to provide the best content and low prices, basically all the competitive dynamics.
Ad inventory and targeting
Netflix is completely sold out on its ad inventory for the launch as the initial demand was very strong. This shows that advertisers are interested in the proposition of bringing their brands and their ads on Netflix. It is also building in a lot of capabilities over the next couple of quarters that will be important to advertisers to make that advertising offering increasingly attractive.
Netflix accelerated the release of its ads tier, which is why it has limited targeting options. Right now. they will have basic targeting capabilities with Basic Ad plans. Gregory K. Peters COO & Chief Product Officer said, “we do have relatively basic targeting capabilities in terms of contextual targeting, genre, et cetera.”
He further added, “Now our job is to move from that into more of what we expect from a digital world, where we have 100% signed-in audience, fully addressable, fully targetable, and so we can start to layer in additional targeting capabilities over time.”
Privacy is also a priority for Netflix. And that is where Microsoft fits the bill. Despite having deeper roots in connected TV advertising than Microsoft, the industry was surprised by Netflix’s ad sales partnership with Microsoft. Peters said, “We’re very cognizant of privacy. And all of the data that we use will just be used to basically deliver more relevant ads offering on Netflix, and we’re not using that data in any way, shape or form for a profile building off Netflix.”
Peter believes Microsoft has the go-to-market capability of Netflix. With the joint capacity growth, they will be able to serve the advertisers better. Netflix recently announced measurement partnerships – DoubleVerify and Integral Ad Science to handle ad verification, viewability and brand safety, and with Nielsen for the audience measurement.
Big change in account sharing
Netflix has finally cracked down on password sharing which has eaten into its bottom line. The streamer will monetize account sharing and will roll out in early 2023. The ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (“extra member”), if they want to pay for family or friends. In countries with a lower-priced ad-supported plan, the streamer expects the profile transfer option for borrowers to be especially popular.
Peter said they have been working to find a balanced approach that supports customer choice and customer-centricity. But also will make sure that “as a business, we’re sort of getting paid when we’re delivering entertainment value to consumers.”
Interesting Read: Have You Played Netflix Games?