Netflix Loses Memberships — Will Ads Help Cash-Strapped Viewers Find Their Way Home?

After a decade of consistent growth, Netflix’s membership is shrinking. The world’s most popular streaming service lost 200,000 subscribers in the first quarter of 2022, bringing total membership to 221.6 million. It expects to lose another 2 million in Q2. As a result of the announcement, Netflix shares recently lost 20 percent of their value.

What’s Behind Netflix’s Subscriber Loss?

Netflix’s chief executive officer Reed Hastings attributes the losses to several factors. The organization recently suspended 700,000 accounts in its booming Russian market as a show of solidarity with Ukraine, while the TV bingeing that characterized the pandemic years is also beginning to wane. Hastings also blamed password-sharing for eating into revenue but didn’t draw attention to the growing competition from the likes of traditional broadcasters and Disney. Many of these are now holding back popular intellectual properties from the streamer and monetizing their huge archives in ways that offer better value for some viewers, especially as inflation drives up the cost of living and viewers are forced to opt out of non-essential TV services.

Improving the Service

Netflix has told investors it intends to woo viewers back by improving its service. In particular, it will focus on improving program quality through better story development and by striving for “creative excellence.” Additionally, a new “double thumbs up” tool will allow viewers to fine-tune their recommendations.

Netflix attributes its 25-year focus on continuous improvement as the reason why it became the largest subscription streaming service globally in the key metrics of paid memberships, engagement, revenue, and profit.

Monetizing Sharing

Netflix has also said it will look for ways to monetize password sharing. While it deliberately introduced features like profiles and multiple streams to facilitate easy sharing within households, these have muddied the waters concerning sharing between households. In the future, Netflix will look to allow members to share their passwords easily and securely beyond their immediate households in exchange for a marginal fee increase.

The organization acknowledges that “sharing likely helped fuel our growth by getting more people using and enjoying Netflix.” It appreciates that monetizing it will be a “short- to mid-term opportunity,” but, with an estimated 100 million subscribers sharing passwords, it’s potentially a significant opportunity.

Advertising

Hastings is well-known for preferring simple subscription models and an aversion to commercials. However, in a recent meeting with analysts, he let them know advertising could be a part of Netflix’s future. He told his audience that allowing advertising-tolerant users to choose a reduced-price subscription was a consumer choice that made “a lot of sense.” He added that his team would be looking at how best to introduce commercials over the next couple of years, potentially offering ad-supported tiers with lowered pricing.

Netflix won’t be the first subscription video service to enter the advertising video on demand (AVOD) space. There has been a steady decline in linear ad budgets, with Discovery, HBO, Hulu, and Disney joining the trend. Microsoft is reportedly considering it for its Game Pass streaming service.

The AVOD model requires operators to understand their target audiences (i.e., viewing habits, disposable income, and preferred devices), and it’s better suited to longer content because short content that only allows for a couple of ads doesn’t justify the cost. Generally, AVOD can be a good fit for publishing aggregators with content from diverse sources and for broadcasters who have old and new content. It also works well for studios and producers with significant content catalogs.

What Will Advertising at Netflix Look Like?

Brands are bound to be excited about Netflix’s data-rich inventory. From its start, the publisher has built upon cloud storage of high-quality audience insights tied to individual email addresses. Additionally, its audience includes people who typically aren’t reachable through TV advertising, and it offers one of the best user interfaces in the business.

One possibility would be for Netflix to copy the likes of Google and create a “walled garden” that prevents third-party ad platforms from participating in ad revenue. But Hastings appears to see ad-matching as a distraction from Netflix’s core publishing business, indicating he wants to focus on creating a great member experience and let others handle its monetization. Moreover, as a content publisher, building and maintaining a proprietary demand-side platform (DSP) would be very costly. For brands and agencies, separately managing ads on a Netflix DSP would be costly as well, given the same content can also be run on other streaming platforms.

Netflix’s about-turn on advertising confirms that subscription-only content models are ultimately unsustainable. Viewers want content but aren’t necessarily prepared to pay for it. Targeted advertising can play an important role in allowing publishers to continue providing content in a model that is more palatable to viewers.