Netflix Focuses on Ad Tier Growth Amid Slowing Subscriber Rates

Netflix likely added the fewest number of subscribers in five quarters during April to June, as the sharp gains from the recent password-sharing crackdown eased, and viewer focus shifted to summer sports events like the Euro soccer tournament.

The company added an estimated 4.82 million subscribers in the second quarter, according to LSEG data. This would be the lowest increase since the first quarter of 2023, and about half of the 9.3 million added in the previous three months. Despite this, Netflix’s strategy to sell a lower-priced ad-supported plan has yielded strong ad revenue growth, with ad revenue expected to have more than doubled in the June quarter.

Overall, Netflix’s revenue likely increased by 16.4% to $9.53 billion, marking the fastest growth since the second quarter of 2021. Original shows like the historical romance “Bridgerton” and the limited series “Baby Reindeer,” based on comedian Richard Gadd’s experience with a stalker, topped most-watched charts in the second quarter, according to Nielsen data.

As Netflix prepares to report second-quarter results on Thursday, investors will be keen to scrutinize its lower-priced plan with advertising and look for updates on new growth drivers. In May, Netflix reported that its ad-supported tier had reached 40 million monthly active users worldwide and accounted for 40% of all sign-ups in available countries, up from 23 million in January.

This shift towards ad-supported plans has resonated well with investors. Netflix’s stock has risen nearly 35% year-to-date, compared with a return of about 19% on the S&P 500 index. Seasonally, viewership tends to decline during the summer months as people travel. Additionally, this year’s Olympic Games, starting on July 26, are expected to draw some viewers away from Netflix.

After heavily investing in original content, Netflix is also driving viewership with its competitors’ shows. Eighteen of the top 20 streamed titles were acquired shows, such as “NCIS” and “Grey’s Anatomy,” according to brokerage MoffettNathanson. Netflix has also announced bundling partnerships with companies like Comcast, which is offering Netflix alongside its Peacock streaming service and Apple TV+ for its Xfinity internet and TV customers.

Moreover, Netflix is hosting more live content. The company has secured a deal to stream two National Football League games on Christmas Day, aiming to create advertiser-friendly events. “More live-event announcements will ensue as the company looks to improve its ad-supported time spent amid an industry-wide reduction in scripted content production,” said Ross Benes, senior analyst at Emarketer.

To fuel its next phase of growth, Netflix announced in May plans to develop an in-house ad technology platform. This platform will give marketers more ways to buy commercials and measure their performance. Initially, Netflix had relied on Microsoft to build the backbone of the ad tier. However, some analysts caution that significant revenue from advertising may not materialize until 2025. “Despite this progress, we continue to see advertising as a longer-term story and do not expect a material revenue contribution until 2025,” stated Jessica Reif Ehrlich, analyst at BofA Global Research, in a note on Monday.

Source: Reuters