August8 , 2022

Explained: Why has Netflix announced a cheaper but ad-supported version of its service?

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As Netflix lost nearly a million subscribers during the three-month period ended June 30, marking the biggest ever quarterly fall in subscribers, the company said it will introduce a cheaper, ad-supported version of its streaming service starting from next year, which it believes will boost membership and profits.

In the January-March quarter, the video streaming giant lost close to 2,00,000 subscribers, the main reason being the war in Ukraine that triggered a suspension of its services in Russia. Rising inflation, fierce competition, and some Covid-related disruptions were also responsible.

And in the June quarter, Netflix lost 0.97 million subscribers — however, beating projections that it could lose as many as 2 million users.

While the company added a significant number of users in Asia Pacific (APAC) in the June quarter, resulting in a revenue growth of 23 per cent over last year in the region, the average revenue it collects from each user in the region fell, owing to price cuts in India.

How did India impact Netflix’s financials?

Netflix saw subscriber additions in the APAC region, which includes India — it added 1.1 million new members in the region in the June quarter, compared to a million new additions in the same quarter last year. While the APAC region witnessed a revenue increase of 23 per cent compared to last year, Netflix’s average revenue per member (ARM) in APAC fell nearly 2 per cent due to price cuts announced in India last year.

The 23 per cent revenue growth in the APAC region is essentially because Netflix added more subscribers in the region — meaning, more people in the region are now paying for Netflix compared to last year.

However, the 2 per cent decline in average revenue per member, led by price cuts in India, means that each customer is paying slightly less. “Excluding India, APAC ARM grew 4% year over year on a constant currency basis,” the company said.

What is the status of ads on Netflix?

The company said it will introduce a cheaper, ad-supported tier in the “early part of 2023”. It had earlier announced a partnership with Microsoft to sell and power its ads. The company may roll out its ad-supported version gradually across markets, starting with countries where “advertising spend is significant”.

“Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one,” Netflix said in a letter to shareholders.

“Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners. While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues),” it said.

What other measures is Netflix taking to increase revenues?

Account-sharing is one of Netflix’s biggest problems, as the company has estimated that nearly 100 million households globally share their Netflix accounts, thus resulting in a loss of revenue for the company. “Widespread account-sharing between households undermines our long term ability to invest in and improve our service,” the company said.

Earlier, Netflix had begun a test asking people to pay more for the ability to share their accounts in Chile, Costa Rica, and Peru. On Monday (July 18), the company announced a separate test with a slightly different method — from August, Netflix will ask users in Argentina, the Dominican Republic, El Salvador, Guatemala, and Honduras to pay more if they want to stream at more than one home.



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