Netflix to Show Ads and Cut Budget After Bleeding Subscribers Globally

The pandemic, the cutthroat streaming wars, and issues around subscriber login sharing were some of the “headwinds” Netflix said it faced at the start of 2022

Netflix has announced that it is making some major changes—including the introduction of a long-resisted ad model to its platform and a dialing-back of its content budget—in the wake of Tuesday’s unexpected announcement that, for the first time in a decade, the streaming behemoth lost subscribers in almost all global regions.

On Tuesday’s quarterly earnings call, Netflix co-CEO and founder Reed Hastings announced that not only did the streamer not hit its lowball goal of 2.5 million subscribers in the year’s first quarter, but it actually shed roughly 640,000 subscribers in the U.S. and Canada region and saw about a 300,000 subscriber drop in the Europe-Middle East/North Africa region—as well as 350,000 subscribers drop the service in Latin America. Netflix did add about a million subscribers in the Asia Pacific market, but it was noted on the call that the overall loss tally by mid-year is expected to be around 2 million. 

The pandemic, the cutthroat streaming wars, and issues around subscriber login sharing were some of the “headwinds” Netflix said it faced at the start of 2022; these were mentioned at the top of a letter to investors posted on the company website on Tuesday.

“Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally,” the letter reads. “However, our relatively high household penetration—when including the large number of households sharing accounts—combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently. While we work to reaccelerate our revenue growth—through improvements to our service and more effective monetization of multi-household sharing—we’ll be holding our operating margin at around 20 percent.” 

On Tuesday’s call, Hastings said that as a result of the dismal first-quarter numbers, Netflix will be rolling out new and cheaper tiered subscriptions that will be ad-supported, similar to that offered by competitor Hulu.

Netflix will be having a look at what shape these will take “over the next year or two,” Hastings said. For years, he has touted the coherence and elegant user experience of the subscription model—which swiftly and effectively altered the way Hollywood films are made and distributed over the past decade.

“Those who have followed Netflix know that I have been against the complexity of advertising, and a big fan of the simplicity of subscription,” Hastings said on Tuesday. “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, get what they want, makes a lot of sense.”

Additionally, Netflix announced that over the next two years it will be reducing its enormous content budgets as a means of increasing its revenue growth. Analysts projected the company’s content budget for 2021 ballooned to $13.6 billion, Variety reported in September, with a whopping $18.9 billion predicted by 2025. 

“We’re pulling back on some of our spend growth across both content and non-content spend,” Netflix’s Chief Financial Officer Spencer Neumann said in a pre-recorded interview on Tuesday. “We’re trying to be smart about it and prudent in terms of pulling back on some of that spend growth to reflect the realities of the revenue growth of the business.”

Notably, Netflix did make the decision in March to suspend service to Russia’s 700,000 subscribers over the invasion of Ukraine. Had this not been the case, the streaming giant would have added 500,000 subscribers for the first quarter, it told investors in Tuesday’s letter.

In that letter, the company also addressed the recent price hike that subscribers have seen rolled out over the past three months. The basic Netflix plan now costs $9.99 (up $1), the standard tier costs $15.49 per month (up $1.50), and the 4K tier costs $19.99 monthly (up $2). This price hike came as inflation rates and gas prices have soared in the U.S. and elsewhere

The company essentially brushed this off as the reason it bled subscribers across multiple regions, saying on Tuesday that “recent price changes are largely tracking in line with our expectations and remain significantly revenue positive.”

The streamer did have a notable win this week, as it announced that the second season of writer/producer Shonda Rhimes’s Bridgerton was watched for 251.7M hours over the past seven days, breaking the record for the most viewed English-language TV series on the platform. It also had recent success with the smash hit Squid Game, which claims the overall record with 571.8M hours viewed during the final week of September.

Squid Game‘s feat could be surpassed, though, when the fourth season of the megahit Stranger Things is released next month.

Nevertheless, on Wednesday, Netflix stock nosedived 37 percent, CNBC reported, as the dramatic and dismal earnings news led to downgrades by Wall Street firms which are now questioning the streamer’s growth potential. This led perpetual attention-seeker and potential SEC target Elon Musk to tweet that “the woke mind virus Is making Netflix unwatchable.”—whatever that means.

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