Netflix To Introduce Major Shift In Strategy

Netflix. Co-CEO, Reed Hastings, has stated his intentions of launching cheaper ad-based subscription plans and charging users for password sharing. This move comes on the back of the Over-the-top (OTT) platform reporting a loss of subscribers for the first time in over a decade while stating inflation, the war in Ukraine, fierce competition, and password sharing as plausible reasons.

Hastings, who has long resisted the idea of allowing advertising on Netflix, made the announcement during the company’s pre-recorded earnings conference call. “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," Reed Hastings, Co-CEO, Netflix, said.

Disney's Asia-focused streamer, Hotstar, has long offered ad-supported tiers in pricing. Netflix had launched aggressive pricing points in response through mobile-only plans in India, at as low as INR 149, while also experimenting with a free mobile plan in Kenya to increase its user base.

However, they had steered clear of allowing advertisements on the platform, until now.

“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 added while citing the models' recent success.

“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.”, he added while acknowledging the sea of change in how Netflix has viewed advertisements in its 25-year history.

"In terms of the move towards ad revenue, we believe Netflix will move to a model wherein the premium content will offer advertisements in a very low key manner without impacting overall customer experience; this is typically similar to what a Disney + offers for the IPL/premium cricket content.", said Karan Taurani, Senior Vice President, Elara Capita while commenting on the announcement.

"50 percent of the paid subscribers share their account passwords which is a major contributing factor for the decrease in paid numbers", he added. 

"Account sharing as a percentage of our paying membership means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth.", the company said while echoing this sentiment on its earnings call.

"This large base of users who don’t pay for the service currently is an attractive audience to convince into converting into subscribers or having their friends and family pay more.". the company added.

To address the password sharing issue, the platform earlier began testing a new, opt-in feature that prompted subscribers in Chile, Costa Rica and Peru to pay extra if sharing the service with people outside their own household. The feature relies on IP address, device IDs and other information about devices signed into the Netflix account across the household to identify dissimilarities. The company now plans to roll-out the opt-in feature globally.

"Over the longer term, much of our growth will come from outside the US." read the company's letter to shareholders while reinstating the need to double down on localized content and originals to optimize growth.  "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.", it added.

"Netflix subscriber growth is heavily dependent on emerging nations due to the penetration opportunity therein; they have already cut prices in India twice, which is now largely on par with other leading OTT platforms. Since these markets are price sensitive, the only other route to grow is Advertising-based Video On Demand', added Karan. 

Despite relatively good performance in foreign categories and projecting an overall growth number, the company fell short of its earlier predictions. Meanwhile, Netflix's Wall Street stock tumbled 26 percent by the bell on Tuesday and eradicated about $40 billion (around INR 3,05,320 crore) of its stock market value.

The company stated to its shareholders that "it will work on all aspects of Netflix – in particular, the quality of our programming and recommendations." "With our strong profitability, we believe we have the foundation from which we can both significantly improve, and better monetize our services in the longer term.", the company added.