April 20, 2022
Happy 4/20, Media Deals readers!
🗣️ Quote of the day: "Did I call it or what?!?" Kevin Mayer tweeted last night, one of the cohort of people unsurprised Netflix is considering ads.
1 big thing: Netflix adapts amid stiffer competition
By embracing advertising and cracking down on password sharing, Netflix is signaling a major shift in how it does business.
Why it matters: Introducing an ad-supported option — something that used to make Netflix execs' skin crawl — is the surest sign yet that the streaming leader is feeling the pressure from its competitors.
- Netflix is coming off one of its worst quarters ever, losing subscribers and warning it will keep losing more (Axios' Sara Fischer has all the gory details here).
- Its stock plunged more than 25% after the market closed yesterday and has been down over 40% since the start of this year. Netflix's stock price was down 36% in early trading today.
Details: You still won't find ads anytime soon. Netflix will slowly introduce cheaper, ad-supported subscription options over the next two years.
Be smart: For once, Netflix is a follower instead of a leader. HBO Max, Paramount+, Peacock and Hulu all offer cheaper subscriptions supported by ads. Disney+ will start doing so later this year.
- “It is pretty clear that it is working for Hulu. Disney is doing it. HBO did it," Netflix co-CEO Reed Hastings said during a video call with investors yesterday. "I don't think we have a lot of doubt that it works."
The big picture: Welcome to Netflix 3.0.
- As we've written before, in addition to ads, gaming is a major part of the refreshed Netflix. With a pair of acquisitions and 17 title launches since November, it's a new business that Netflix has established rather quickly.
- "We're building capacity, frankly, faster than we did when we entered film," Hastings said.
- Look at its recent deal with the card game "Exploding Kittens," which includes both a TV show and a mobile game, as a model for future content deals.
By the numbers: Netflix makes an average $11 per each of its 222 million subscribers. In the U.S. and Canada, the average revenue per user (known as ARPU) is nearly $15.
- CFO Spencer Neumann said they're shifting their thinking on key metrics to focus more on engagement and making more money from existing users. "Subscriber numbers are sort of less relevant over time," he said during the investor video call.
- As subscriber growth flattens, that's where cracking down on password sharing comes in. Netflix estimates roughly 100 million households watch Netflix using someone else's password.
- The idea is to identify those households that share passwords and rather than ban from them doing so, charge them more.
What they're saying: "[W]e have witnessed a company go from growth darling to growth purgatory in an instant. ... Yet, the question from here is whether the company has gotten cheap enough for new buyers to step in. We would argue not yet, as we are still incredibly uncertain about what the revenue base in 2023 and 2024 looks like," MoffettNathanson senior analyst Michael Nathanson wrote in an investor note today.
What's next: Netflix is embarking on its most consequential quarter in a very long time.