Netflix sheds 970K subs in Q2, eyes launch of ad-based tier in 'early' 2023Netflix sheds 970K subs in Q2, eyes launch of ad-based tier in 'early' 2023
Netflix says it's likely to debut a less expensive, ad-supported product in a 'handful of markets where advertising spend is significant.'
July 19, 2022
Although Netflix was expected to lose about 2 million streaming subscribers in the second quarter of 2022, it lost only 970,000. The result caused shares to jump more than 7% in after-hours trading Tuesday.
The streaming giant also dug into a plan to reaccelerate revenue growth with strategies that include the rollout of paid sharing plans and an ad-supported tier that's slated to launch in select markets early next year.
Netflix added 1.54 million subs in the year-ago quarter and ended Q2 2022 with about 220.67 million streaming subs worldwide. By region, the company lost 1.3 million in the US/Canada and 770,000 in the EMEA (Europe, the Middle East and Africa) region. Netflix gained about 10,000 subs in Latin America and added 1.08 million in the Asia-Pacific region.
Figure 1: Netflix lost less than half the 2 million subs it was projected to lose in Q2 2022.
Netflix expects to quickly gain back the subs it lost, projecting it will add about 1 million in the third quarter of 2022 (versus a gain of 4.4 million in Q3 2021) and end the period with 221.67 million subs worldwide.
Netflix posted Q2 2022 revenues of $7.97 billion, up 8.6%, and net income of $1.44 billion ($3.20 diluted earnings per share). However, the company expects revenues to drop to $7.83 billion in the third quarter of 2023, resulting in year-over-year growth of just 4.7%.
"Reaccelerating our revenue growth is a big challenge," Netflix acknowledged in its Q2 2022 letter to investors (PDF). "But we’ve been through hard times before."
Ads and paid sharing on tap for 2023
With respect to revenue acceleration, Netflix intends to deal with this wave of hard times through advertising and paid account sharing.
On the ad front, Netflix recently announced a tech partnership with Microsoft and said the time is right to pursue an ad-supported version of the service, which will continue to offer ad-free tiers.
"Our global ARM [average revenue per member] has grown at a 5% compound annual rate from 2013 to 2021, so it makes sense now to give consumers a choice for a lower priced option with advertisements, if they desire it," Netflix reasoned.
Netflix hasn't announced expected pricing on an ad-supported tier or what kind of revenues it believes it can squeeze out of the ad model, but the company said it's targeting a launch "around the early part of 2023."
But don't expect Netflix's ad-supported tier to launch internationally (or even nationally) right out of the chute.
"We'll likely start in a handful of markets where advertising spend is significant," the company said. "Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one."
Netflix said it's also in the "early stages" of a paid sharing approach that intends to crack down on customers who share passwords outside of the subscribing household. Netflix believes that more than 100 million households use but don't directly pay for the service.
Eyes on Latin America
Netflix has rolled out two approaches to password sharing in Latin America. One enables subs on Standard and Premium plans to add accounts for up to two people they don't live with (each with their own profile and personalized recommendations and login credential) for $3 extra per month. The other allows customers on Basic, Standard and Premium plans who share their account to transfer profile information, either as a new account or as an "Extra Member" account, that retains their viewing history and personalized viewing lists and recommendations.
Netflix said it likes the consumer response it's seen so far in Latin America but didn't say which approach is working best. However, "the goal is to find an easy-to-use paid sharing offering" that can be rolled out in 2023, the company said.
Netflix is also using a portfolio of games to keep subs engaged with the platform on mobile devices. Following a launch of a small batch of games last November, it now offers a menu of 24 games. Netflix, which has recently acquired three game studios (Night School Studios, Boss Fight Studios and Next Games) has yet to say much about how its games strategy is performing, but noted that "millions" of subs have played games on its mobile platforms.
Record number of streamers cut the pay-TV cord – study Netflix calls in Microsoft for ad support Online video subs will keep surging globally – Omdia Netflix looking to buy – then possibly build – its advertising biz Commercial break: Netflix weighs whether ads will ease sub slippage — Jeff Baumgartner, Senior Editor, Light Reading
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