Netflix loses fewer subscribers than expected and says cheaper ad tier is coming in early 2023


Netflix shares jumped after the company said it lost fewer subscribers than anticipated during the second quarter.

The streamer also said it aimed to unveil its lower-cost, ad-supported tier in early 2023. This comes on the heels of Netflix tapping Microsoft to be its partner on the ad-supported offering.

“We’ll likely start in a handful of markets where advertising spending is significant,” the company said in its shareholder letter. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one.”

Netflix had warned investors last quarter that is expected to shed around 2 million subscribers but only lost around 970,000 during the three-month period ending June 30.

Here are the results:

  • EPS: $3.20 vs $2.94 per share, according to Refinitiv.
  • Revenue: $7.97 billion, vs. $8.035 billion, according to Refinitiv survey.
  • Global paid net subscribers: A loss of 970,000 subscribers vs. expectations of a loss of 2 million, according to StreetAccount estimates.

The company, which currently has 220.67 million subscribers, said it expects net adds to reach 1 million in the third quarter, reversing some losses seen during the first half of the year. Analysts had predicted Netflix would guide for growth of around 1.8 million.

Netflix also noted that it is in the early stages of its paid sharing plan. This is an effort mentioned last quarter that would upcharge some members for sharing their subscription with family members or friends that live outside their homes. The company said it is looking at two different approaches in test cases in Latin America that can inform a wider rollout in 2023.

Netflix gave us less bad news than we expected, says shareholder George Seay

The company warned of the strengthening U.S. dollar’s impact on its international revenue, which makes up 60% of its top line. The dollar’s surge comes as the Federal Reserve hikes interest rates to fight four-decade-high inflation in the United States.

Last quarter, Netflix addressed its slowing revenue growth, which it said was the result of competition, account sharing, and other factors such as sluggish economic growth and the war in Ukraine.

“We’ve now had more time to understand these issues, as well as how best to address them,” the company said.

It remains focused on content, offering big-budget films on its service rather than in theaters, and providing all episodes of new shows all at once for subscribers to binge. The company touted “Stranger Things” season four as a big win for the brand. Not only did it top viewership records for the company, but it was also nominated for several 2022 Emmys.

Netflix’s shares, which traded at around $700 last year, closed Tuesday at just above $200.

Netflix executives see content spending of about $17 billion in 2021 lingering there through 2023.

It’s the latest shift for the giant streamer that’s always been gung-ho about spending and was seen as nosing up to the $20 billion range. But as part of an overall industry rethink — and its own — CFO Spencer Neumann said, “We are expecting to spend about $17 billion this year, and we are in the right ZIP code.”

“We have come through a pretty big business transition,” he said during the company’s post-earnings second-quarter video call, referring to a plunge during the past five to 10 years into original production, which now makes up over 60% of the total. Content spending will continue to grow but be “moderated,” he said. “We have gotten smarter in how we can direct our spend for the greatest impact.”

“We spent the way we spent to get to where we are today,” said co-CEO Ted Sarandos, agreeing that “in general, we are kind of in the right ZIP code” for the next few years.

The execs stressed that Covid costs, which have inflated total spending recently, are way down.” Stranger Things 4 came up again in this context — it helped stem subscriber losses last quarter but inflated overall costs.

“That show, in particular, was affected [by Covid] as much as any because of the young cast, the size, and scope of the production, and multiple locations we shot it in. It was a very expensive burden to deliver it,” Sarandos said, prompted by founder and co-CEO Reed Hastings.

“One of the catalysts for splitting the season in half was how long it took to produce that show,” he added, “and a lot of that was stalled because of early shutdowns of the production, and restarting production and being extremely careful with the cast of the show early on in Covid. So it was more financially impacted than a lot of our other projects were. … If you did that again, you might even get a few extra episodes out of it.”

The push and pull around spending is extreme. Doug Anmuth of JPMorgan, who was asking the questions, noted that half of the investors he talks with want streamers to spend more, while others want a big pullback.

“Welcome to my life,” Sarandos joked.

Netflix plans to launch its advertising tier in early 2023, but not all of the shows that are currently streaming on the service will make the cut.

Co-CEO and Chief Content Officer Ted Sarandos admitted that the cheaper tier, which will be rolled out with Microsoft as its technology and sales partner, will not have all of its licensed content.

Obviously, the tier will be able to include all of Netflix’s original series, but the streamer still licenses a large amount of content from the U.S. studios and international distributors, and it is in talks with these partners about making some of these shows available.

“Today, the vast majority of what people watch on Netflix, we can include in the ad-supported tier,” Sarandos said on today’s earnings call. “There are some things that don’t and we’re in conversations with the studios on, but if we launched the product today, members in the ad tier would have a great experience. We will clear some additional content but certainly not all of it but don’t think it’s a material holdback for the business.”

Netflix jumped ahead of Thursday’s planned release by Nielsen of monthly viewership through TV sets, revealed in its second-quarter shareholder letter today that its share of total TV viewing in the U.S. hit an all-time high of 7.7% in June, up from 6.6% in June 2021.

The stat, which is expected to be part of Nielsen’s monthly report on the overall TV and streaming field, proves “our ability to grow our engagement share as we continue to improve our service,” the company wrote in the letter.

“While we always have room to improve, we’re very pleased with how far we’ve come in providing so much satisfaction and enjoyment to our members,” it said. “In the U.S., which is one of the most competitive markets in the world, we drew more TV viewing time than any other outlet during the 2021-22 TV season.” The letter included a chart showing Netflix at 1.334 trillion minutes of streaming, dwarfing second-place CBS, which had 753 billion minutes of viewing.

Stranger Things, the start to whose fourth season set a Nielsen record with 7.2 billion minutes of streaming from May 30 to June 5, along with widely seen titles like The Lincoln Lawyer and Adam Sandler basketball drama Hustle, drove tune-in during the month.

How to release strategy correlates with tune-in continues to be the subject of vigorous debate. While Netflix’s signature binge-release strategy — a marked contrast with the typically one-episode-at-a-time method of Disney+, Apple TV+, HBO Max, and other rivals — has served it well by some measures for the past decade, skeptics have questioned the company’s insistence on it during such a reversal of fortune for Netflix. The company has now lost more than 1 million subscribers in the first half of 2022 compared with a gain of 26 million in the first half of 2020. Why keep burning off all of that programming, the criticism goes, when a phenomenon like Stranger Things could become a two-month orgy of publicity and word of mouth?

In the shareholder letter, the company appeared to push back and defend its methodology, though it did not draw attention to the fact that both Ozark and Stranger Things had staggered rollouts of their most recent seasons.

“As a pure play streaming business, we’re unencumbered by legacy revenue streams,” the letter said. “This freedom means we can offer big movies direct-to-Netflix, without the need for extended or exclusive theatrical windows, and let members binge watch TV if they want, without having to wait for a new episode to drop each week. This focus on choice and control for members influences all aspects of our strategy, creating what we believe to be a significant long-term business advantage.”

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