Netflix shared its first quarterly earnings since rolling out anti-password sharing in the US.
The streaming giant made $8.2 billion in revenue this quarter, up 3% YOY and in line with the company’s expectations. But a big chunk of that growth is thanks to a higher rate of new subscribers, which Netflix credits to making people pay to share their accounts.
“Our primary revenue growth [engine] this year is new paid memberships, and that’s largely driven by our paid sharing rollout,” CFO Spencer Neumann told shareholders on Wednesday.
Netflix gained 5.9 million net new subscribers this quarter, compared with only 1.5 million last quarter. Turns out those moochers will pay for their own accounts after all.
The company prioritized anti-password sharing this year expecting that most new or downgraded users will sign up for its ad-supported tier. But unfortunately for Netflix, the percentage of users watching with ads is still too small, so advertising revenue isn’t “material” yet, according to the shareholder letter.
And despite holding its first-ever upfront this year, Netflix didn’t have a lot of good news to share about its advertising growth.
Still pending
Sign-ups for Netflix’s Standard with Ads plan (originally Basic with Ads) doubled this quarter compared with last quarter.
That might sound good, but it’s not surprising: Netflix’s ad-supported offering has only been around since November.
Netflix didn’t break down subscriber numbers publicly, but told advertisers this week that its ads plan currently has about 1.5 million subscribers in the US. That’s a paltry 2% percent of its roughly 75 million US subscribers. For comparison, Disney+, which also just launched ads, has had much quicker momentum gaining sign-ups for its new ad tier.
On the plus side, Netflix’s average revenue per user (ARPU) for Standard with Ads is higher than it is for its other offerings. This is a sign that its advertising model could work financially – only if more people join the plan.
Because its ad-supported user base is still so small, ARPU is actually down 1% YOY, and the company expects similar numbers for Q3. Advertising remains only a small portion of the company’s revenue.
“Advertising [revenue] is still very small overall because it’s still nascent to the business,” Neumann said. “We expect it to be a gradual revenue build and not a big contributor [to revenue] this year.”
Which explains why Netflix was pretty tight-lipped about how its first upfront season went.
“We’re seeing good demand and good progress on our upfront [negotiations despite] a softer advertising market,” said Co-CEO Greg Peters.
The company also didn’t share any updates about the new advertising features it announced at its upfront, nor did it share progress on building out its own ad tech stack, which has been making headlines recently because of how much Netflix has leaned on Microsoft Advertising for its new ad sales biz.
Netflix has a lot of work to do to “progress from building the basics into that [more] innovative space,” Peters said. “Our job now is really to add more features that make our advertising offering more attractive [to brands],” he added.
But what advertisers really want is for Netflix to get more people on its ad-supported tier. And it sure had a lot to say about paid sharing, its primary effort to meet that demand.
Pay up
Netflix is actively enforcing against password sharing in over 100 countries, 80% of its revenue base. But it’s not stopping there.
“As of today, paid sharing is now launching in nearly all of the countries where we operate,” Peters said. “We’re seeing that it’s working, both in terms of revenue and new subscribers relative to prelaunch.”
According to Peters, new sign-ups are exceeding the number of cancellations from those who churned in all regions where paid sharing has been enforced.
Netflix declined to share how many account holders decided to pay an additional $7.99 per month to add a friend or family member. Instead, it focused on its optimism that sign-ups for Standard with Ads will continue to rise because some moochers (fine, “borrowers”) will take longer to register for their own accounts after getting kicked off someone else’s.
Some viewers watch Netflix every day, and they’re signing up for subscriptions right away, Peters said. More casual viewers may take longer to decide whether they want to pay for Netflix, which needs to convince them by continuing to add more content.
“We’ll see more of the business impact from paid sharing distributed over the next few quarters,” Peters said.
Chugging along
In the meantime, Netflix is trying to make sure new account holders and users downgrading choose the ad-supported plan by taking away the cheapest ad-free option.
Earlier this week, Netflix nixed its $9.99 per month Basic plan in the US and UK, weeks after doing so in Canada.
“This latest move reflects what we think will best achieve [more Standard with Ads] subscriptions in those countries,” Peters said. He added that Netflix is waiting to see how the split between new sign-ups for Standard with Ads and the Standard plan (now the cheapest ad-free plan at $15.49 per month) pans out before continuing the rollout to other regions.
Netflix remains confident that anti-password sharing, in addition to its recent pushes to get more subscribers signing up for ads, will continue to grow ARPU and, ultimately, advertising revenue. But it could take years.
Advertising and paid sharing are both still very early days for Netflix, Neumann said, but “we’re confident we have the core fundamentals to build a material ads business over [the next] several years.”
Netflix shares dropped as much as 9% during after-hours trading.
