After posting huge subscriber gains, Netflix says revenue is the metric that matters

Netflix will stop forecasting subscriber numbers as its business model evolves
The premiere of Netflix's film "All Quiet on The Western Front" in Berlin, Germany.
The premiere of Netflix's film "All Quiet on The Western Front" in Berlin, Germany.
Photo: JOHN MACDOUGALL (Getty Images)
We may earn a commission from links on this page.

Netflix delivered a surprise to streaming industry watchers by adding 2.41 million paid subscribers in the third quarter, doubling its own growth projections. In July, the company said it expected to add just 1 million new subscribers.

The Oct. 18 earnings report suggests Netflix has emerged from its recent struggles after two quarters of subscriber declines, and a steep drop in its stock price. The company now expects new subscriber growth to double again next quarter as it adds 4.5 million new subscribers by the end of the year, likely fueled by new sign-ups to Netflix’s cheaper ad-supported tier.

But the company is shifting its focus toward revenue rather than maintaining such growth in the face of rising competition. Netflix executives said this earnings report will be the last one to forecast subscriber numbers. Investors, they hope, will begin to see Netflix as a diversified entertainment media brand instead of just a streaming company.

Netflix minimizes talk of the subscription race

In January 2023, Netflix will only provide revenue guidance as it attempts to decouple its fortunes from signing up more and more subscribers. “We are increasingly focused on revenue as our primary top-line metric,” states the company’s most recent earnings letter (pdf). “This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing.”

Netflix was the pioneer when it launched subscription streaming services in 2007, but it now faces a host of competitors with deep pockets replicating its model and introducing new offerings such as ad-supported services. Netflix still has the most subscribers of any streaming service, but the days of unchallenged growth are over. That forced it to reposition its business model around extracting more revenue from its 223 million users. “A lot of Netflix’s public financial reporting will get more complicated with new types of subscriptions,” says Matt Voda, CEO of adtech firm OptiMine. “They are likely trying to make it easier for Wall Street and also mainstream investors to understand how the company is performing.”

Netflix’s future lies beyond streaming

Netflix executives called the company’s shift from subscription growth to revenue a “guidance evolution,” one they likely hope will change how Wall Street measures the company against rivals such as Disney+ and Amazon Prime Video. Both are closing in on Netflix’s subscriber numbers, but, unlike Netflix, they rely on non-streaming products to add new subscribers and boost revenue.

That’s forced Netflix to reframe its message. By portraying itself primarily as an entertainment studio, Netflix can benefit from the comparison with content-only market players such as Disney. Netflix wants to escape the narrative that it’s in a race to add as many subscribers as possible, especially against competitors also offering mobile hardware, home appliances, and e-commerce platforms.

To compete, Netflix plans to diversify its revenue. For example, it’s expanding gaming offerings, adding another 55 games to its current selection of 35, none of which have yet been monetized through in-app purchases or advertisements. The company’s ad-supported revenue, although it has yet to generate meaningful profit, may also become more important than subscriptions in the coming years. “The reaction from advertisers so far has been extremely positive,” the company stated in this week’s earnings report.

For Netflix, that’s an appealing story to tell investors about the future. “By moving [Wall Street’s focus] to a simple, but ultimately [more] important metric like revenue, it is a lot easier to tell the story of the business fundamentals, and whether the business is improving over time regardless of what happens on the subscriber front,” Voda said.