Netflix bites the advertising bullet: To launch ad-supported subscription plans

Netflix's Q1 revenue up 10% to $7.86 billion; Co-CEO Reed Hastings says the company is making good progress in markets like India

e4m by Javed Farooqui
Published: Apr 20, 2022 8:02 AM  | 4 min read
Netflix

Video streaming giant Netflix has decided to launch an ad-supported cheaper subscription plans following slowing down of subscriber growth. Netflix Co-CEO Reed Hastings made the announcement during the company’s pre-recorded earnings conference call. Hastings had for long resisted the idea of allowing advertising on Netflix.

“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 to get what they want," Hastings said.

He further stated that the ad-led subscription option will not be available on the service for a year or two. Netflix's biggest competitor Disney+ has already revealed plans to introduce an ad-supported subscription beginning in the US in late 2022, with plans to expand internationally in 2023.

Hastings said the move by its competitors to launch ad-supported plans has played a big role in Netflix also biting the advertising bullet. “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,” Hastings said.

He also averred that Netflix's ad-backed tier will not have data tracking and ad-matching. “In terms of the profit potential, definitely the online ad market has advanced, and now you don’t have to incorporate all the information about people that you used to. We can stay out of that, and really be focused on our members, creating that great experience.”

Meanwhile, Netflix's Q1’22 revenue has grown 10% to $7.86 billion driven by an 8% year-over-year increase in average streaming paid memberships and 2% year-over-year growth in Average Revenue per Membership (ARM). Excluding an F/X impact of -$280 2 million, year over year revenue and ARM growth stood at +14% and +6%, respectively. Operating income of $2 billion was above the beginning of quarter forecast of $1.8 billion due to lower than projected content expense.

For the first time in more than a decade, the company has seen a drop in paid net additions due to the suspension of its service in Russia. The company lost 200,000 subscribers against a guidance forecast of 2.5 million and 4 million in the same quarter a year ago. The winding-down of all Russian paid memberships resulted in a 700,000 impact on paid net adds. Excluding this impact, paid net additions totalled 500,000.

In its letter to the shareholders, Netflix noted that the main challenge for membership growth is continued soft acquisition across all regions. It added that retention was also slightly lower relative to the guidance forecast. It also said that the recent price changes are largely tracking in line with the company's expectations and remain significantly revenue positive.

The company said it was making good progress in markets like India. "We’re making good progress in APAC where we are seeing nice growth in a variety of markets including Japan, India, Philippines, Thailand, and Taiwan."

For Q2 2022, the company has forecast paid net additions of -2.0m vs. +1.5m in the year-ago quarter. The forecast assumes that the current trend of slow acquisition and the near-term impact of price changes plus typical seasonality (Q2 paid net adds are usually less than Q1 paid net adds) will continue.

It has projected revenue to grow approximately 10% year over year in Q2, assuming roughly a mid-to-high single-digit year-over-year increase in ARM on an F/X neutral basis. It is targeting a 19%-20% operating margin for the full year 2022, assuming no material swings in F/X rates from when we set this goal in January of 2022.

Netflix noted that its service is being availed by 222 million paying households with over 100 million additional households, including over 30 million in the UCAN (the US and Canada) region. "Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth," the company said.

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