In a dramatic reversal of Netflix's strategy — fostered by a massive misfire in a first-quarter subscriber loss — the streaming service says it will consider starting up a low-cost advertising-supported option.
Reed Hastings, president and co-chief executive officer of Netflix, disclosed the major change of direction during an earnings conference call, saying he now was “open” to offering a lower-priced tier supported by advertising.
Hastings said: “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. And allowing consumers who would like to have a lower price and are advertising-tolerant to get what they want makes a lot of sense. So that's something we're looking at now.”
In January, Netflix raised the price of its most popular standard plan to $15.49, from $13.99.
Netflix has long resisted any talk of an advertising option — amid many years of steady subscriber growth for its popular advertising-free subscription service.
All major legacy-owned premium streaming services now offer an advertising-supported option. The most recent addition is Disney+, which announced plans last month for an ad-supported option to begin later in 2022.
This change of direction occurred after Netflix recorded a somewhat shocking net global subscriber loss of 200,000 in the first quarter of 2022 versus fourth-quarter 2021 on Tuesday.
Wall Street analysts were expecting a 2.7 million gain in worldwide subscribers. This crushed Netflix's stock market price down big time in after-market trading on Tuesday -- down as 25% to $259.75.
Netflix's worldwide subscribers totaled 221.64 million. It was the first time Netflix lost subscribers in over 10 years.
Most territories lost ground in subscribers on a quarter-by-quarter basis -- including Russia, where there was a decline of 700,000 subscribers. In addition, the U.S. and Canada lost 640,000 in the period, to now total 74.58 million.
Only Asia-Pacific territories grew — adding 1.1 million to 33.72 million.
It gets worse. Netflix estimates it will lose two million subscribers in the second quarter of this year, versus as previous estimate, by way of analysts, who had projected the company would add 2.6 million subscribers.
In a letter to shareholders, Netflix said: “Our relatively high household penetration -- when including the large number of households sharing accounts -- combined with competition, is creating revenue growth headwinds.”
In addition to competition and password sharing, Netflix also blamed inflation and overall sluggish economic growth.
In other big news, Netflix says password sharing occurring on among 100 million additional non-paying households, including 30 million in the U.S. and Canada.
Recently, Netflix issued a proposed plan to end free sharing of accounts -- which has been a growing issue, according to analysts. Netflix users who share passwords with people outside households will pay between $2 and $3 a month.
Netflix's competitors were also hit with the hard news.
After-market trading of Roku was down 6.5% to $109.18, while Paramount Global sank 5.2% to $34.38, Walt Disney dropped 5.2% to 125.07, Warner Bros. Discovery went down 3% to $23.75.
Still, Netflix touts that it continues to build share of total U.S. TV time -- now at 6.4% of total streaming (February 2022), up from 6.0% (May 2021).
Netflix's revenue for the quarter was up 10% year-over-year to $7.9 billion, while net income dropped to 6% to $1.6 billion.
In the previous four quarters, revenues grew 16% (Q4 2021), 16.3% (Q3 2021), (19.4% (Q2 2021), and 24.2% (Q1 2021).
"A couple of years ago Netflix asserted that its main competition was Epic Games (the maker of Fortnite), and not the other streaming services," said Mike Proulx, vp/research director of Forrester, in an email to Television News Daily.
"However, it's clear now that many of the other streaming services must be taken seriously as formidable Netflix competitors — especially as those competitors grow, acquire, and merge their IP to gain more reach and scale."