People haven't fallen out of love with Netflix, yet.
Netflix impressed The Street on Tuesday by reporting it only lost 970,000 subscribers during the past quarter, ahead of its prediction that it would lose two million paying accounts in that time frame. Now, as Netflix prepares to roll out an advertising-supported version of its service, the fact that it's still retaining its popularity has only bolstered confidence in the company's future.
"Q2 was better-than-expected on membership growth, and foreign exchange was worse-than-expected (stronger US dollar), resulting in 9 percent revenue growth (13 percent constant currency)," the company wrote in a letter to shareholders. "Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content, and marketing as we've done for the last 25 years, and to better monetize our big audience."
Netflix advised it would add one million subscribers in the third quarter of 2022, offsetting some of the losses earlier this year. The company, which previously announced it would be working with Microsoft to launch an ad-supported version, said the offering should be available in early 2023.
"The competition has also forced Netflix to reverse its longtime stance against ads," Mike Proulx, Forrester vice president and research director, said via email. "When the company launches its ad-supported tier in early 2023, it'll provide cost relief to its ad-tolerant users who are feeling the price pinch while also attracting new, price-conscious, users who have been reluctant to pay a premium price point."
About 8 percent of U.S. adults say they would subscribe to a cheaper, ad-supported Netflix tier, according to Forrester's May 2022 Consumer Energy Index and retail pulse survey.
Earnings per share came in at $3.20, ahead of Refinitiv estimates of $2.94, and revenue was slightly lower than analyst expectations, coming in at $7.97 billion versus the estimated $8 billion.
The lower-than-expected number of subscriber losses comes at a time when Netflix is facing increased competition from other streaming media companies.
According to Parrot Analytics, Netflix accounted for 41.2 percent of the demand for original shows among streaming media this past quarter, a marked decline from a year ago when it made up 45.2 percent. It was also the lowest level of interest in Netflix original shows recorded since Q4 of 2019 when both Apple TV+ and Disney+ entered the market.
"Netflix once disrupted the entertainment space but now is the one being disrupted by competitive streaming platforms that have been aggressively scaling up," Proulx said. "While bad for Netflix, this is good for consumers who now have more options and choices for streaming content. However, what continues to differentiate one streaming service from another is compelling proprietary content offered at a fair value."
The interest from advertisers is there, especially because Netflix offers a way to reach an audience that doesn't watch traditional TV and binge watches for hours on end. There's also interest in the company's first-hand data on its subscribers, which might not be accessible by other platforms, said Paul Coggins, CEO of mobile advertising company Adludio, via email.
"The challenge now will be to ensure that users are engaged by the ad campaigns which are delivered to them on the ad-supported tier," Coggins added. "Creativity needs to be prioritised as users' attention is at a premium, and with so many rival streaming services to choose from, static and unoriginal campaigns will only serve to push consumers away rather than attract them in."