Netflix, an American subscription video-on-demand streaming service, is expected to report its slowest subscriber growth in the last one and half years on Thursday, as the initial surge from its password-sharing crackdown begins to fade.
As part of a shakeup that began in mid-2022, Netflix has been blocking the previously widespread practice of sharing subscriber passwords with friends and family living in other households.
Since this implementation, Netflix has seen its subscriber and earnings growth accelerate in the last quarter, and has picked up nearly 55 million more paying customers, pushing its worldwide subscriber count to nearly 278 million through June this year.
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Netflix added 8 million subscribers during the April-June period, marking a 37% increase over the same time last year. It was the sixth consecutive quarter, that Netflix’s subscriber gains have increased from the previous year.
The company’s profit in its latest quarter rose 44% from last year to $2.15 billion, or $4.88 per share, a figure that exceeded the estimates of analysts. Revenue climbed 17% from last year to $9.56 billion, also eclipsing analysts projections.
However, the company, subscribers gains from the password-sharing have begun to fade, prompting the company to sharpen its focus on selling more ads for its low-priced option, which the company said ended June with a 34% increase in total subscribers from March. It didn’t detail precisely how many of its worldwide subscribers have chosen to watch ads for the cheaper price.
Meanwhile, despite the widening audience for commercials, Netflix said it doesn’t expect advertising to be a major source of revenue growth until 2026 at the earliest. “Ads are going to be a bigger piece of the puzzle, but it won’t be in 2024 or 2025”, Spencer Neumann, Netflix’s chief financial officer, told analysts during a conference call.
As subscriber growth decelerates, Netflix is pivoting its focus to other key metrics, such as revenue growth and profit margins. Notably, the company plans to stop reporting subscriber data after 2025.
“Their focus is to continue growing subscribers at a healthy rate while also leveraging their scale to raise prices and boost advertising dollars,” said Pivotal Research analyst Jeff Wlodarczak.
Netflix’s ad-supported tier has shown growth, but the company has yet to disclose specific financial details. Analysts do not expect this tier to become a significant growth driver until 2026, raising concerns about the platform’s long-term trajectory. “They’re making less than a billion dollars a year on U.S. advertising, which doesn’t look impressive,” commented Ross Benes, an analyst at Marketer.
Some experts suggest that Netflix may need to raise prices and phase out more of its ad-free plans to steer customers toward its ad-supported tier, which tends to generate higher revenue per user. Notably, investors are now focusing on Netflix’s ability to leverage its advertising business for future growth.
The company, which operates in more than 190 countries, is expected to report ad revenue of $242.7 million in the third quarter, according to the average of estimates from three analysts compiled by LSEG. Overall revenue is expected to grow 14.3%, a slightly slower pace than the previous three months, to $9.76 billion.