After a disappointing quarter which saw subscriber numbers drop for the first time since October 2011, Netflix is now considering an ad-supported subscription offering. Internal forecasts predicted subscriber numbers to grow by 2.5 million in the last quarter, but actually saw subscriber numbers drop by 200,000. The result of this announcement resulted in the share price dropping 26 percent.
It is important to note that Netflix suspended services in Russia following the Ukraine invasion, resulting in a loss of a reported 700,000 subscribers in Russia across the quarter. An additional 500,000 new subscribers were registered over the quarter. These new subscribers are coming from the APAC region, which has seen growth in Japan, India, the Philippines, Taiwan, and Thailand. Subscriber numbers are still very high, with a user base reported to be 221.6m globally.
The next few quarters will be crucial for Netflix, as the threat of audience plateauing, or reduction, may result in big changes to their incredibly successful business model. Competition from other streaming services continues to threaten to take share from Netflix. A number of high profile mergers and acquisitions, with the Discovery/Warner Media merger and Amazon’s purchase of MGM, as well as increased offerings from Peacock and Disney+ are making the streaming space more saturated.
Factor in that subscription costs of Netflix have been going up consistently over the last few years, putting Netflix as one of the most expensive players in this space now, and those users who are beginning to consider reducing their number of subscriptions will likely start with the most expensive.
To address this, Netflix are now considering offering a lower cost, ad-supported subscription model. This goes against the approach that Netflix has taken over the years, but Netflix CEO Reed Hastings recognises that services like Disney and HBO Max have seen success in their ad funded subscription offering. In addition, these ad-supported subscriptions offer more choice for consumers and allows them options to pay what they are comfortable playing.
Those who have followed Netflix know that I’ve been against the complexity of advertising, and a big fan of the simplicity of subscription. But, as much as I’m a fan of that, I’m a bigger fan of consumer choice
Reed Hastings, Netflix CEO
While an ad-supported approach may offer consumers more choice, it will likely only happen if Netflix begins to see a sizable decrease in subscribers. While competitors are engaged in the streaming space as an extension of other offerings, Netflix does not have this luxury. With roughly 220m users around the world paying a fixed monthly fee, Netflix is doing phenomenally well and are able to justify the amount they are spending on original content each year. If subscriptions begin to drop, an ad-supported offering may help to get people back or entice new users to join, but the advertising revenue required would need to at least match what they are currently delivering.