Netflix is planning to introduce ads for the first time in its 25 years history due to revenue growth headwinds emanating from loss of subscribers. The film streaming company said Tuesday it will offer ad-supported tiers to consumers over the next two years.
Competition in the streaming industry has gone intense recently with more players like the DStv joining the on-demand video streaming services. With subscription-based streaming as only its source of revenue, Netflix has been hardly hit by global economic headwinds buoyed by Russian-Ukraine conflict.
Netflix recorded a loss of 200,000 subscribers in the first quarter, its first in a decade. The company’s co-chief executive Reed Hastings said on the earnings call that it will introduce the ad-supported plans to give customers more choice.
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Per TechCrunch, the company blamed a number of factors for the decline in its subscriber base. It said the slowdown is a sign of saturation in its major markets. It also acknowledged the growing competition from rivals such as Disney, Paramount and Warner Bros. The company also noted that more than 100 million users watch Netflix by borrowing credentials from others.
Password sharing has since last year been a big concern to Netflix, who once threatened to halt the practice. But now it is exploring other options to address the concern as it faces one of the most challenging times in its history. The company, while acknowledging that its revenue growth had “slowed considerably,” said it needs to convert subscribers who don’t pay.
“Our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds,” it said in a statement earlier Tuesday. On its earnings call, the company said 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.
However, the plan to venture into ads marks a significant shift in Netflix’s business model, given the company’s earlier stance on advertisement. The company has over the years frowned at the idea of selling ads to its roughly 222 million subscribers. TechCrunch quoted Hastings from a 2017conference saying that Netflix was not well suited to compete with the likes of Facebook and Google on ads.
A shift to the ad playbook has become a viable option owing to the changes in market activities since the past five years. Netflix has tried to woo subscribers across its markets including India, Indonesia and Kenya and boost revenue by lowering subscription fees.
Per TechCrunch, Netflix introduced its most affordable monthly pricing tier to date in India in December, where individuals can subscribe to Netflix for as low as 199 rupees ($2.6). The company last year offered a free mobile plan in Kenya. Though the company said it is “seeing nice growth” in a variety of markets including India, and has recorded 10% to $7.8 billion revenue growth, which falls short of Wall Street expectations of $7.9 billion, its recent loss paints a gloomy future if it maintains its belief on ads.
Netflix said it expects to lose 2 million more global subscribers in the current quarter. The company’s shares fell as much as 27% to $256 in extended trading.
Analysts have long argued that Netflix should explore and adopt advertisements besides its aggressive marketing. Hastings said, citing the success of rivals Hulu and Disney, that the ad model has matured enough and proven successful. “We don’t have any doubt that it works,” he said.
The plan will mean creating an ad-free streaming for consumers who don’t want ads, and offering incentivized subscription bouquets for subscribers who accept ads.
Per TechCrunch, Disney has long offered an ad-supported tier on several of its services, including its Asia-focused streamer Hotstar. The company said last month that it plans to launch an ad-supported Disney+ plan in the U.S. later this year.
“Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice,” he said.
“Allowing consumers who would like to have lower price and are advertising tolerant get what they want makes a lot of sense,” he said, adding that the company is not viewing the ad-supported model as a “short-term fix.”
Customers who don’t wish to see ads will continue to be offered ads-free plans, he said.
“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. So we can be a great publisher and have other people do all the fancy ad-matching and integrate all the data about people … so we can stay out of that,” he said.