Netflix has unveiled its financial performance for the third quarter, revealing both the gains and hurdles it faces. Although the streaming service added close to 9 million new subscribers, it's having a tougher time expanding into the advertising sector.
Subscribers rise, but ad revenue lags behind
Netflix points to its success in curbing password-sharing among users as a reason for the increase in new subscriptions. The company said that its efforts to persuade account sharers to buy individual subscriptions are paying off. They noted, “The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention.” This has led to the streaming platform being “revenue positive in every region.”
Due to this subscriber retention success, Netflix is bumping up the prices of its basic and premium plans in the UK. Despite this, the price of its ad-supported model remains unchanged. This hints at the obstacles Netflix is encountering in scaling its ad business.
Ad-supported tier shows promise but is slow to grow
Netflix revealed that memberships for its ad-supported tier grew by nearly 70% quarter-over-quarter. However, it didn't disclose what portion of its overall membership this represents. It did share that this ad-supported tier accounts for 30% of new sign-ups in the 12 countries where it's available. Moreover, over 70% of Netflix's total memberships are now from outside the US.
The company admitted that building a new advertising business from scratch is time-consuming. Hence, they expect ad revenue to have a small impact on their bottom line in 2023.
Innovations in advertising and partnerships
Netflix is not sitting idle. It is actively exploring new advertising formats specifically designed to attract brands. For example, they offer a ‘hero spot,' which appears after a user binge-watched a certain number of episodes. This spot informs the user that the next episode will be ad-free, thanks to sponsorship by a particular brand.
Furthermore, Netflix is building partnerships with brands for title sponsorships. Recent collaborations include Frito Lay's Smartfood, which sponsored the latest season of “Love is Blind,” and a series of sponsors like T-Mobile and Nespresso for Netflix's inaugural live sports event, “The Netflix Cup.”
To diversify its revenue streams, Netflix is investing in real-world experiences, including a project known as ‘Netflix House,' which will combine live experiences with food and retail, themed around its existing and future intellectual property.
Financial performance holds steady
The streaming service recorded an operating income of US$1.9 billion for the quarter, a 25% increase compared to the same quarter last year. Average paid memberships grew 9% year-on-year, reaching 247 million subscribers globally.
Despite challenges in fully launching its ad-supported tiers, the success of Netflix's paid memberships and various other revenue streams—bolstered by popular original and licensed content—gives the company some breathing space to experiment and evolve.
