Netflix pleased with its ad-supported plan

Netflix has stated that it is pleased with its progress on the ad-supported plan across every dimension: member experience, value to advertisers, and incremental contribution to its business.

It was in November that the streamer successfully launched its new, lower-priced ad-supported plan in 12 countries.

“Engagement, which is consistent with members on comparable ad-free plans, is better than what we had expected and we believe the lower price point is driving incremental membership growth. Also, as expected, we’ve seen very little switching from other plans. Overall the reaction to this launch from both consumers and advertisers has confirmed our belief that our ad-supported plan has strong unit economics (at minimum, in-line with or better than the comparable ad-free plan) and will generate incremental revenue and profit, though the impact on 2023 will be modest given that this will build slowly over time,” Netflix stated in it letter to shareholders.

“We believe branded television advertising is a substantial long-term incremental revenue and profit opportunity for Netflix, and our ability to stand up this business in six months underscores our commitment both to give members more choice and to reaccelerate our growth,” it further said.

Paid sharing

Later in Q1, Netflix expects to start rolling out paid sharing more broadly. According to the streaming giant, today’s widespread account sharing (100M+ households) undermines its long-term ability to invest in and improve Netflix, as well as build its business.

“While our terms of use limit use of Netflix to a household, we recognize this is a change for members who share their account more broadly. So we’ve worked hard to build additional new features
that improve the Netflix experience, including the ability for members to review which devices are using their account and to transfer a profile to a new account. As we roll out paid sharing, members in many countries will also have the option to pay extra if they want to share Netflix with people they don’t live with. As is the case today, all members will be able to watch while traveling, whether on a TV or mobile device. As we work through this transition – and as some borrowers stop watching either because they don’t convert to extra members or full paying accounts – near term engagement, as measured by third parties like Nielsen’s The Gauge, could be negatively impacted. However, we believe the pattern will be similar to what we’ve seen in Latin America, with engagement growing over time as we continue to deliver a great slate of programming and borrowers sign-up for their own accounts,” it said.

Competition

Netflix said it continues to operate in a highly competitive market as consumers have a vast number of entertainment choices.

“Beyond our direct streaming competitors, we also vie for consumers’ time against linear TV, YouTube, short-form entertainment like TikTok, and gaming, to name just a few. The silver lining is that the market for entertainment is huge and Netflix is still very small by comparison. For example, in the more than 190 countries we operate in, our $30B+ of annual revenue compares against the combined annual estimated ~$300B pay TV/streaming industry, $180B branded TV advertising spend and $130 billion consumer spend on gaming. It’s not easy to build a large and profitable streaming business. But we’re competing from a position of strength, as we lead the industry in terms of engagement, revenue and streaming profit,” it said.

As a pure-play streaming company, Netflix said it is also not anchored to shrinking legacy business models, like traditional entertainment firms, allowing it to lean hard into the big growth opportunity ahead of us.

“As we’ve said before, beyond revenue and profitability, another way to look at our business is through engagement, and we are pleased to have Kantar join Nielsen – who have expanded their efforts – and BARB to publicly report on both the shift from linear to streaming as well as the viewing share of different entertainment companies in Brazil, Mexico, and Poland,” the letter stated.