Netflix is considering offering an ad supported tier of its service at a lower cost, sometime in the next two years. During the company’s quarterly earnings call, Co-CEO of Netflix, Reed Hastings, said: “Those who have followed Netflix know that I have been against the complexity of advertising, and a big fan of the simplicity of subscription. But as much as I am a fan of that, I am a bigger fan of consumer choice. And allowing consumers who would like to have a lower price, and are advertising-tolerant, get what they want, makes a lot of sense.”
Hastings also acknowledged the success competitors had experienced while offering an ad supported service: “It is pretty clear that it is working for Hulu, Disney is doing it, HBO did it. We don’t have any doubt that it works.”
The move comes after Netflix revealed it lost subscribers for the first time in ten years, with its total number of subscribers declining by 200,000 over Q1 2022. The fall brought the company’s total subscriber base down from 221.8 million to 221.6. The company has said it expects to lose 2 million by the end of the current quarter. In the immediate aftermath of the news, share price fell by 20%.
Netflix has attributed the drop in subscribers to increased competition, a challenging economy, the war in Ukraine, the slowing rollout of broadband, coupled with its already high levels of market penetration. According to the company, its decision to withdraw from the Russian market cost the streaming service 700,000 new subscribers.
Another factor behind the decline in subscribers emphasised by the company is the prevalence of password sharing and non-paying households having access to the service. Netflix estimates that, on top of its 222 million paying households, there are an additional 100 million non-paying. The company said: “[There] are already over 100m households that are already choosing to view the service. They love the service, we have just got to get paid at some degree for them.”
Dominic Sunnebo, Global Insight Director at Kantar – a data, insights and consulting company – believes the streaming service will find it challenging to clamp down on password sharing. He said:
“Netflix has been trialling a scheme for monetising password sharing in South America, and suggested that up to 100m HHs gain access to Netflix via this method.
It’s a big number, designed to buoy worried investors, but converting even a small fraction of these to full paying customers is not an easy task, particularly so when consumers are looking for ways to save money, not spend more.
If the schemes to counter password sharing move too fast and too aggressively, it also risks alienating a potential future audience -many who password share beyond the household are not actually aware they’re breaking the terms of their subscription.”
Sunnebo believes that Netflix’s potential plans to roll out an ad supported version of the service is far more significant than its plans to stop password sharing, commenting: “If Netflix does go down this route it’s game changing, not just for Netflix and its ability to generate a very significant new revenue stream, but also for the world of advertising. Netflix has reach close to that of traditional TV in a number of major markets around the world – it’s power to enact large scale change here should not be underestimated.”
