Much like what US cable has done with broadband, Netflix has altered its narrative on its streaming business. Rather than focusing on sheer subscriber growth, the streaming giant is steering itself toward revenue growth, stoked in part by its new ad-supported service plans and the expansion of its password-sharing policies.
However, some analysts are struggling to make heads and tails of Netflix's revenue growth story largely because the company is not providing much revenue-focused granularity tied to some of its latest moves.
Prior to the launch of its ad plan and password-sharing policies that aim to tack on "extra members," Netflix's business was relatively simple, straightforward and predictable – price multiplied by subscribers.
"Yes there was variability around expectations for subscriber additions, but the drivers were clear. Today, that could not be further from the truth!," Michael Nathanson, analyst at MoffettNathanson, proclaimed in a research note (registration required) issued in the wake of Netflix's Q2 2023 results – results that beat analyst expectations on subscribers but missed on revenues.
Q2 results aside, the devil's in the details on Netflix's revenue growth story, and a lot of those details are still lacking in the early days of Netflix's ad-supported tier and its paid sharing plans.
Without more detail about the accounts being added via the password sharing crackdown and additional insight into the number of subs getting the ad-supported tier, "the drivers underpinning Netflix's revenue growth are more unclear than ever, giving us less confidence in our ability to accurately model this company," Nathanson explained.
But others seem to be buying the story that Netflix is positioned to reignite revenue growth, as the analyst points out that Netflix's stock is up more than 60% year-to-date.
Nathanson said he remains "cautiously optimistic" about Netflix going forward, keeping his "market perform" rating on the stock and a target price of $380.
Tier changes poised to spur Netflix's ad biz
Meanwhile, Netflix has been making some other changes to help fit its new approach, particularly around its ad-supported tier.
The big one there is the decision in some markets (including Canada and more recently in the US and the UK) to halt the sale of its former ad-free Basic plan to new customers and to instead zero in on three:

Netflix's former ad-free Basic tier is no longer available to new subscribers in the US.
(Source: Screenshot from Netflix's new subscription flow)
Netflix hasn't disclosed much detail about how its ad-supported tier is faring, other than to say it's seeing "steady growth" since its debut in November 2022.
Nathanson estimates that Netflix will have 5.5 million of its subs in the US and Canada on the ad tier by the end of 2023 and 17.1 million by the end of 2025.
And he also expects the shift away from the ad-free Basic tier to give Netflix's advertising business a jolt. The analyst is forecasting that Netflix ad revenues will exceed an assumed $3 billion Microsoft guarantee in 2025 (Microsoft is Netflix's primary ad-tech partner) "and continue to grow rapidly from there."
As for Netflix's full subscription business, the analyst now expects Netflix to add 20.5 million subs in 2023, aided by the company's expanded password-sharing clampdown.
One area of concern is Netflix's average revenue per membership (ARM) as 2022 price increases are lapped and there's a continued mix-shift toward lower-ARM markets such as India, Nathanson noted. That's led him to lower his Q3 revenue growth estimate by -500 basis points to +7.6%, reaching $8.5 billion.
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— Jeff Baumgartner, Senior Editor, Light Reading