Netflix is upgrading some features of its new ad-supported tier as the streaming giant moves to phase out a DVD rental distribution business that debuted about 25 years ago.

Netflix launched its ad-supported tier in a dozen countries last November, including a Netflix Basic with Ads offering in the US that sells for $6.99 – $3 less than its ad-free Basic tier.

Figure 1: (Source: Netflix)

Netflix has yet to break out how many of its 232.5 million global streaming subscribers are on the ad-supported tier, but the company said it is pleased with the per-member economics it has seen so far. In the US, for example, Netflix said its ads plan already has a total average revenue per member (subscription-plus-ads) that exceeds its standard, ad-free plan.

In a tweet, LightShed Partners analyst Richard Greenfield took a stab at explaining what that means when comparing Netflix's ad-free and ad-supported Basic plans:

As a result of the initial solid results from its ad business, Netflix is upgrading some features of the plan, including a move to 1080p video quality (up from an original 720p) and an allowance of two concurrent streams (up from one) across all 12 markets that have launched Netflix Basic with Ads.

"We believe these enhancements will make our offering even more attractive to a broader set of consumers and further strengthen engagement for existing and new subscribers to the ads plan," Netflix explained in its Q1 2023 investor letter.

Cannibalization of its premium, ad-free plans still isn't an issue, according to Netflix, which said it's seeing "very little switching from our standard and premium plans."

Broad launch of 'paid sharing' initiative

Netflix is also preparing to expand a "paid sharing" program that it has already launched in Canada, New Zealand, Spain and Portugal. Reiterating that it is grappling with the financial impact of account sharing in more than 100 million households, Netflix is happy enough with the program that it plans to roll it out broadly, including in the US, in the second quarter of 2023.

Netflix noted that it continues to see some cancellations when it first introduces paid sharing in a market, but it is also finding that growth returns as prior account borrowers start to activate their own accounts and as existing subs add "extra member" accounts.

"For example, in Canada, which we believe is a reliable predictor for the US, our paid membership base is now larger than prior to the launch of paid sharing and revenue growth has accelerated and is now growing faster than in the US," Netflix said.

DVD biz to shut down this fall

Even as Netflix moves ahead on two new parts of its business – advertising and paid sharing – it is bidding adieu to its original (and shrinking) DVD business. Following a 25-year run, Netflix said it will ship its final DVDs on September 29, 2023.

Netflix paired the announcement with a few stats related to its fading DVD business:

Figure 2: (Source: Netflix)

Financial and subscriber snapshot

Netflix added 1.75 million streaming subs in Q1, extending its global grand total to 232.50 million, up 4.9% year-over-year. Netflix, which lost about 200,000 subs in the year-ago quarter, is no longer providing subscriber guidance as it shifts its focus to revenue growth, operating margin and profitability metrics.

Netflix posted Q1 2023 revenues of $8.16 billion, up 3.7% year-over-year, and net income of $1.3 billion, or $2.88 per diluted share. Netflix expects Q2 revenues of $8.24 billion, up 3.4%, and operating income of $1.6 billion, roughly flat on a year-over-year basis.

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— Jeff Baumgartner, Senior Editor, Light Reading