Did Netflix’s ad-supported tier bait work to hook users? The answer to this question lies somewhere in the streaming giant’s earnings, which will be released after markets close tomorrow (Apr. 18).
The $6.99 plan—which is $3 cheaper than the basic plan in the US—launched in mid-quarter in November 2022, so its impact wasn’t entirely visible in the company’s earnings last quarter. This earnings season marks the end of the first full quarter since Netflix launched its ad-supported tier.
The success of the ad-supported subscription plans is kind of a litmus test for the company’s password sharing clampdown, which has already begun in a handful of markets like Chile, Peru, Costa Rica, Canada, New Zealand, Portugal and Spain. As people need to cough up extra money to add an “extra member” that doesn’t physically reside in their households, millions will get locked out of friends’ and families’ accounts. Wall Street will have its eyes and ears glued to what these freeloading customers do next.
Assuming many of these subscribers are price-conscious—hence the sharing of passwords—the $6.99 ad plan is the most affordable subscription. But there is another option altogether: “cancel Netflix.” Searches for these terms surged in the aftermath of paid sharing announcements. As the password-sharing crackdown rolls out to more markets—including its biggest, in the US—investors expect some pushback.
Wall Street is Watching: Password crackdown in the US
“We think a US announcement is imminent, given how pervasive password sharing is in the region and the money Netflix is therefore leaving on the table by allowing free riders.” —Macquarie analyst Tim Nollen
Netflix’s business, by the digits
1 million: US monthly active users for Netflix’s ad-supported services
30: Number of countries where Netflix slashed its prices in February by between 20% and 60%
57: Original titles lined up in the second quarter, versus 125 in the first, which included the hit shows The Night Agent and You Season 4
$770 million: Estimated ad revenue the Los Gatos, California firm will make from its new ad-supported tier by the end of 2023, according to Insider Intelligence. It’s expected to grow to $1.07 billion by 2024 and $1.28 billion by 2025
$8 per month: What extra member pricing in the US is expected to look like, according to Wells Fargo analyst Steven Cahall
26.3%: Netflix’s share of overall OTT subscription revenues in the US by the end of 2023, down from 49.1% in 2018, according to Insider Intelligence
15 million and 30 million: How many more subscribers the ad-tier could draw onto Netflix in the US, but not right away
19%: Share of Netflix’s new sign ups in the US that were opting for an ad-supported plan in the third month. The uptake is slower than Disney+ (36%) and HBO Max (21%), but at least it’s not missing viewership guarantees
Charted: New signups are increasingly picking Netflix’s ad-supported tier in the US
More originals means less discounts on Netflix’s ads plan
There was a negative correlation between the volume of upcoming Netflix Originals and the level of discount Netflix is offering for subscription to its new ad-funded tier in non-English speaking markets, according to an Ampere Analysis report looking at November data, commissioned by Netflix. That’s the case for Japan, where the rate of discount is the lowest, and the volume of local Originals is the highest.
“Given this push into non-English-language scripted content it’s understandable Netflix is less inclined to offer high rates of discount for its new ad-supported tier service in markets where it has made significant investment,” Ampere’s Olivia Deanna wrote. “Although some non-English-language titles have found international success (such as Squid Game, Lupin, or La Casa de Papal), there is a risk that localised content will struggle to find wider appeal beyond its home market.”
Company of interest: Microsoft
Netflix partnered with Microsoft last July for ad tech. The two are locked in a contract for two years. A report in Digiday last month said that Netflix is in a “build or buy” conundrum about its agreement with the Redmond, Washington-based behemoth.
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💸 Netflix’s earnings won’t yet show the full impact of the new $6.99 ad-supported subscription