Netflix has grown from a mail-order DVD rental company to become the leading streaming service and producer of award-winning content. However, with so many companies offering something similar, the competition is cutthroat. For that reason, some analysts believe that this platform should sell ads.
In two separate meetings in recent weeks, Netflix executives told employees to be more mindful about spending and hiring, he noted. Information. This came as the streaming giant faces a sharp slowdown in subscriber growth.
You may also like
Netflix deflates: loses subscribers and blames shared screens
Netflix has considered options that could help offset the hit to revenue from the subscriber slowdown, including cracking down on people sharing account passwords. And while it has long enabled password sharing, it has become more common in the United States and other parts of the world than executives anticipated, the people involved told The Information.
Still, it should be mentioned that this company effort has been underway for almost a year, that is, long before the slowdown became apparent.
What emerges from the Netflix meetings is that the company should hire more people (lots of them) and they should create a product that will increase subscribers and revenue. And, according to analyst Ben Thompson of Stratecherythat product is advertising.
The service had 222 million subscribers by the end of 2021. But even so, as The Information noted, that number isn’t rising as fast as it used to.
Netflix had subscriber growth of more than 20 percent, year over year, for a long time, but hasn’t broken that mark since the fourth quarter of 2020; in fact, growth for the past three quarters was in the single digits.
According to Ben Thompson, part of that is likely because the pandemic fueled growth and Netflix approached saturation of the North American market, gaining 75 million subscribers among 132 million households. At the same time, competition has intensified from Disney Plus, HBO Max, Paramount Plus, Amazon Prime Video and Peacock.
Despite this, Netflix has a strong business. “Two years ago we had revenues of around $20 billion dollars… now we have revenues of $30 billion,” said last month Spencer Neumann, the company’s chief financial officer.
So what would ads be needed for? According to Thompson, of course, there are other ways Netflix can increase revenue: raise prices, which the company has done regularly over time; video games, which Netflix has prioritized by buying three studios in the last seven months, and password policing, which the company has already tested and which could generate $1.6 billion a year.
But these options have disadvantages. Rising prices may lead to platform abandonment, it’s not yet clear whether Netflix and gaming fit together, and password policing will piss off half of America, at least. All of these factors make a compelling case for Netflix to start building an advertising business, says Thompson.
First, a subsidized or ad-supported tier would broaden Netflix’s subscriber base, which is not only good for the company’s long-term growth prospects, but also for its competitive position when it comes to acquiring content.
This also goes for the company’s recent attempts to crack down on password sharing and the competitiveness of a developing world: an advertising-based subscription tier is a much more affordable alternative.
Second, advertising would make it easier for Netflix to keep raising prices: on the one hand, it would provide an alternative for customers who would otherwise drop the service, and on the other, it would create a new benefit for those willing to pay. (ie an ad-free service for the highest levels).
Third, advertising is a natural fit with the jobs Netflix does. Yes, customers enjoy watching shows without ads, although, again, they can still pay for that experience. But filler television, which Netflix also specializes in, can easily be filled with ads.
Above all else, though, is the fact that advertising is a huge opportunity that aligns with Netflix’s business. The company once won with a differentiated user experience that was worth paying for, and today Netflix commands little attention due to its investment in unique content.
According to Thompson, that attention can and should be sold, more so because it increases the company’s ability to invest in more exclusive content and charge higher prices to its user base.
Of course, this would be a lot of work and a big change in Netflix’s well-defined value proposition. But the company has already made big changes before.
The reason advertising is currently a possibility for the platform is because it’s a streaming service, not a DVD distributor like it once was. From that point of view, a new business model (or an additional one) is just another rung on the company’s ladder.