It hasn’t been a great year for Netflix investors. In Q1, the streaming pioneer has reported its first subscriber loss in ten years, sending its stock plummeting, losing over a third of its value in a single night, resulting in a loss of 75% since its record high reached in late 2021.
In the wake of this surprising member decline, the management team has announced a change to the business model it currently uses. In addition to its subscription services, it now plans to provide an ad-supported level, something the firm has long resisted putting in place. The recent decision to provide a lower-priced tier that includes some advertising could mark a significant turning point for Netflix and some estimates suggest that its revenue might surge, fueling a rebound for its falling stock price.
It all “ads” up
Much like the offerings from Walt Disney’s Warner Bros and Hulu. Discovery’s HBO Max and Netflix plan to provide a lower-priced tier to its customers that will use occasional advertising to defray the normal subscription cost. The firm has yet to decide on any specifics, such as the amount of hourly ads and the cost of its ad-based video on demand (AVOD) services, which will ultimately have an impact on its subscriber base and revenue growth. Investors could, however, use the estimates to get close.
HBO Max is offering a plan that starts at $9.99 per month, which will also include about four mins of advertising each hour. If Netflix were to do the same, the company could boost its U.S. subscriber numbers from its current levels — estimated at around 66 million active users– to 76 million users, according to estimates given by The Information.
The goal is obviously to boost its revenue and subscriber count, so the actual combination of subscription cost and advertising will most likely differ — but it is easy to see how Netflix cam benefit by providing an ad-supported level.
Rumor has it
While Netflix has been silent as to the exact nature of its future plans, the rumor mill has filled in the blanks. Roku stock has recently surged on rumors of a potential acquisition by Netflix, as the firm would directly benefit from Roku’s advertising experience, but the meetings might have been to talk about marketing services. The firm has also reportedly had meetings with Comcast, Alphabet’s Google, and its subsidiary NBCUniversal to talk about potential advertising partnerships.
Netflix has closed out 2021 in a fine fashion, generating revenue of almost $30 billion, up an impressive 19% YOY. In fact, since the beginning of the Covid pandemic, revenue increased 47%, fueled by the 55 million new active subscribers. However, as the pandemic subsided, Netflix’s long history of growth promptly reversed its course, resulting in the loss of almost 200,000 accounts in Q1 — and the company is predicting it will lose another 2 million in the second quarter.
Now would be an excellent time for Netflix to engineer a turnaround and the creation of a lower-priced tier may be just the catalyst Netflix needs.