Netflix ‘done with shrinking’ as it reverses subscriber slump ahead of new ad-supported streaming option
- The streaming giant is working to kick-start membership growth with a US$7 ad-supported tier after subscribers shrunk by 1.2 million in the first half
- Netflix has been hit by a rocky global economy and new competition, especially in the US, where the market has reached maturity
Shares of Netflix jumped 14 per cent in after-hours trading, boosted in part by the streaming giant’s forecast that it would pick up 4.5 million customers in the fourth quarter. The company’s stock, an investor favourite during its years of rapid growth, had fallen nearly 60 per cent this year before the earnings report.
“Thank God we’re done with shrinking quarters,” said co-CEO Reed Hastings, adding the company needs to continue gathering momentum by focusing on content, marketing and a lower-priced plan with advertising.
From July through September, Netflix attracted 2.4 million new subscribers worldwide, more than double what Wall Street expected.
“Netflix’s impressive numbers show the company’s growth story is far from over,” said Investing.com analyst Haris Anwar.
During the quarter, Netflix released the final episodes of season four of sci-fi hit Stranger Things, plus serial-killer series Dahmer – Monster: The Jeffrey Dahmer Story, which became one of Netflix’s most-watched series of all time.
The streaming giant is working to kick-start membership growth after a sudden decline in the first half of the year, when the company’s subscriber base shrunk by 1.2 million amid a rocky global economy and growing competition for online video viewers. Netflix now has a total of 223.1 million subscribers around the world.
Most established services have stopped growing in the United States, where the market has reached maturity. Newer entrants, such as Paramount Global’s Paramount+, are picking up market share thanks to live sports programming.
In its quarterly letter to shareholders, Netflix noted that other media companies are losing money from streaming.
“Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard,” the letter said.
Netflix estimated that competitors would end 2022 with combined operating losses of “well over US$10 billion”, compared with Netflix’s annual operating profit of US$5 billion to US$6 billion.
Rivals such as The Walt Disney Co run multiple businesses, including television networks and theme parks that offset streaming losses.
For the third quarter, Netflix topped analyst projections with revenue of US$7.9 billion, up 6 per cent from a year earlier. Earnings were US$3.10 per share.
The company’s forecast of 4.5 million customer pickups by the year’s end came in slightly ahead of Wall Street estimates, which had averaged 4.2 million. For the fourth quarter, Netflix projected revenue of US$7.8 billion, a sequential decline it blamed on the strong value of the US dollar.
In early November, Netflix is launching a US$7-per-month streaming plan with advertising to attract cost-conscious customers.
“We’re quite confident in the long term that this will lead to a significant incremental revenue and profit stream,” chief product officer Greg Peters said.
He did not disclose how many new subscribers, or how much revenue, Netflix expects from the advertising plan.
PP Foresight analyst Paolo Pescatore predicted some of Netflix’s current subscribers will switch to the lower-priced option.
“Some will downgrade or decide to come back to Netflix,” Pescatore said. “The move is as much about retaining users as well as signing up new ones.”
Another analyst, Wedbush’s Michael Pachter, saw the ad-supported tier as a tool for to reduce cancellations by giving price-sensitive subscribers an alternative.
Disney, Warner Bros Discovery and other companies also offer, or plan to offer, ad-supported options.
While Netflix is making various changes to propel growth, the company said it remained committed to producing original programming and releasing all episodes at once for binge watching.
“We believe the ability for our members to immerse themselves in a story from start to finish increases their enjoyment but also their likelihood to tell their friends,” the company said.
A new season of British royal family drama The Crown and a sequel to 2019 movie Knives Out will be released during the fourth quarter.
Netflix said it would no longer provide quarterly guidance for new customers. The company will continue to issue forecasts for revenue, operating income and other categories.
“We are increasingly focused on revenue as our primary top line metric,” the company said.