Background:

This week Netflix reported its Q3 earnings, revealing a reverse in its subscriber decline. The streaming giant also shared more details about its ad-supported service that launches next month and revealed it is seriously exploring cloud gaming.

Details and Implications:

At its earnings call earlier this week, Netflix reported it had added 2.4 million new subscribers in the last quarter, comfortably beating its own expectations. The turn-around follows two consecutive quarters of loses and can be attributed to the release of hit shows such as Stranger Things series 4, as well as tactics it has used to make the platform more enticing, including changing how it packages its shows.

Netflix’s growth is still slow, but it has arrested the decline of recent quarters as it fights against a plethora of streaming competitors such as Amazon, Disney and Apple, who have all invested heavily into streaming content. After scorning advertising for years, in April, in a move that shocked the industry, Netflix announced that it was considering introducing an ad-supported tier, confirming it a few months later and announcing that Microsoft would be its ad partner, providing exclusive technology and sales support.

The ad-supported tier has been confirmed to debut on 3rd November in Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain, UK and the US, priced at $6.99 per month and ahead of Disney Plus’s ad tier which launches on 8^th December.

Netflix said those 12 markets account for approximately $140bn of brand advertising spend across TV and streaming. Users subscribing to the Netflix Basic with Ads tier will be served ads that are anywhere from 15 to 30 seconds long, they will not have access to the whole Netflix library due to licensing limitations and can’t download anything onto their devices.

Netflix disclosed last week that its initial advertising inventory, which will be limited to four to five minutes per hour, with frequency caps, was nearly sold out. During the earnings call, the company also shared more about its ad capabilities and acknowledged that they are limited and are mostly competitive with television, not digital, right now but more sophisticated offerings and targeting are in the pipeline. Netflix’s ultimate goal is delivering a fully addressable, 100% signed-in audience and leveraging its “personalization” capabilities to tailor ads.

Netflix is also set to roll out ‘paid sharing’ in 2023, a way to monetize the current password sharing that is against Netflix’s terms and conditions. It will give those people that have been watching Netflix programming through a personalized profile on someone else’s account the ability to transfer that profile to a new account. It will also give subscribers the option to add more sub-account profiles – for example if parents wanted to pay for their children to have a sub-profile on their account even when they don’t live at home.

Additionally, an unexpected revelation from Netflix this week was that it is seriously exploring a cloud gaming service of its own and will also open a new gaming studio in Southern California. This comes just a few weeks after Google announced it was shutting down Stadia after struggling with user adoption. Netflix currently offers a few mobile games, so scaling a full cloud gaming service is a big jump. It seems the company is considering an approach more like Xbox’s cloud gaming, and not a stand-alone service. Mike Verdu, Netflix’s gaming boss said: “for us, delivering games to your TV or to your PC is value add. We’re not asking you to subscribe as a console replacement. So, it’s a completely different business model.”

Summary:

All eyes will be on the user numbers around Netflix’s new ad supported offering and its impact on its core subscription business. The addition of a more complex pricing model to suit different wallets shows Netflix is investing in diversifying its business model. The move into Cloud Gaming is an even clearer indication that it is looking for more ways to monetise its user base in different ways. The next sets of results will be watched very closely for signs of success or failure.

Further Reading:

MediaPost | Adweek | The Verge | TechCrunch

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