Netflix plans to introduce ads for the first time in its 25-year history due to headwinds to revenue growth from losing subscribers. The movie-streaming company announced on Tuesday that it will offer consumers ad-supported tiers over the next two years.
Competition in the streaming industry has recently intensified with more DStv players joining video-on-demand streaming services. With subscription streaming as its sole source of revenue, Netflix has been hit hard by global economic headwinds buoyed by the Russian-Ukrainian conflict.
Netflix posted 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 would introduce ad-supported plans to give customers more choice.
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According to TechCrunch, the company blamed a number of factors for its declining subscriber base. He said the slowdown is a sign of saturation in his main markets. He also acknowledged 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 been a big concern for Netflix since last year, and it has already threatened to end the practice. But now he is exploring other options to address the concern as he faces one of the toughest times in his history. The company, while acknowledging that its revenue growth had “slowed considerably”, said it needed to convert non-paying subscribers.
“Our relatively high household penetration — if you include the large number of households sharing accounts — combined with competition, creates headwinds for revenue growth,” he said in a statement Tuesday. On its earnings call, the company said that this large base of users who are not paying for the service is currently an attractive audience to convince to convert into subscribers or charge their friends and family more.
However, the plan to move into advertising marks a significant shift in Netflix’s business model, given the company’s previous stance on advertising. Over the years, the company has frowned on the idea of selling ads to its roughly 222 million subscribers. TechCrunch quoted Hastings at a 2017 conference as saying Netflix wasn’t well suited to compete with Facebook and Google on ads.
Switching to the advertising playbook has become a viable option due to the evolution of market activities over the past five years. Netflix has tried to win over subscribers in its markets, including India, Indonesia and Kenya, and to increase revenue by lowering subscription fees.
Per TechCrunch, Netflix introduced its most affordable monthly pricing tier yet in India in December, where individuals can subscribe to Netflix for as little as 199 rupees ($2.6). Last year, the company offered a free mobile plan in Kenya. Although the company said it was “seeing nice growth” in various markets, including India, and saw revenue growth of 10% to $7.8 billion, which is below of Wall Street’s expectations of $7.9 billion, its recent loss paints a bleak future if it maintains its belief on the ads.
Netflix said it expects to lose an additional 2 million global subscribers in the current quarter. Shares of the company fell 27% to $256 in extended trading.
Analysts have long argued that Netflix should explore and embrace ads in addition to its aggressive marketing. Hastings said, citing the success of rivals Hulu and Disney, the advertising model has matured enough and proven itself. “We have no doubt it works,” he said.
The plan will be to create ad-free streaming for consumers who don’t want it and offer incentivized subscription packages to subscribers who accept ads.
According to 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 United States later this year.
“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. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice,” he said.
“Allowing consumers who want a lower price and who are tolerant of advertising to get what they want makes a lot of sense,” he said, adding that the company does not consider the model funded by advertising as a “short-term solution”.
Customers who don’t want to see ads will continue to be offered ad-free plans, he said.
“In terms of profit potential, the online advertising market has certainly advanced and you no longer need to include all the information about people you used to. ‘other people to do all the fancy advertising matching and integrating all the people data…so we can stay out of that,’” he said.