Netflix has told its employees that plans to introduce an ad-supported tier will come into play before the end of the year – much sooner than previously anticipated. That's according to a report in the New York Times (opens in new tab).
In a leaked company memo from its executives, Netflix indicates that it's on course to launch a new, cheaper subscription option with adverts in the final three months of 2022. The note also suggests that plans are afoot to begin cracking down on password sharing around the same time.
Last month, the seemingly invincible and much-aped Netflix sent shockwaves throughout the media industry when it announced significant subscriber losses for the first time in a decade. In a first-quarter shareholders meeting, the company reported a global net loss of 200,000 paid users in the first three months of 2022 compared to Q4 of the previous year. It said it was braced to lose a further two million subscribers before July.
After its acknowledgement that revenue growth had slowed considerably, shares in the streaming giant immediately dropped by more than 25 per cent, wiping more than £23bn /$30bn / AU$40.3bn off its market value and rising to around £56.5bn / $70bn / AU$99.8bn since.
At the time, Netflix pointed to changing consumer behaviour as part of the problem, saying: “Covid clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the Covid pull forward”. But the service also indicated that users sharing passwords were also to blame for its struggles.
Globally, more than 100m households are estimated to be sharing Netflix accounts. While sharing passwords outside of a household violates Netflix's terms of service, it’s long been a common practice that the company has recognised as one of its most vital marketing tools. CEO Reed Hastings even called it (opens in new tab) “a positive thing” back in 2016, but Netflix’s once laidback attitude has inevitably shifted.
The service has previously trialled restrictions on password sharing with verification codes and is currently testing a new feature in Chile, Costa Rica and Peru where subscribers can add up to two cheaper sub-accounts for people outside of their homes.
In a video message regarding the shareholders' announcement last month, Netflix chief operating officer Greg Peters clarified the company's new position on the practice saying: “If you’ve got a sister that’s living in a different city, you want to share Netflix with her, that’s great; we’re not trying to shut down that sharing. But we’re going to ask you to pay a bit more to be able to share with her, so she gets the benefit and the value of the service, but we also get the value of the revenue associated with that viewing.” But he also implied that any global rollout of more stringent account sharing protocols would be some way off: “Just to set your expectations, my belief is that we’re going to go through a year or so of iterating and then deploying all of that".
That "year or so" now seems to be rapidly curtailed – in its most recent note to employees, the company said that the ad-supported tier due before the start of 2023 would be introduced “in tandem with our broader plans to charge for sharing”. Seeming to acknowledge that the goalposts had now changed, the note also said: “Yes, it’s fast and ambitious, and it will require some trade-offs”.
Previously, Netflix has always said adverts are not on the cards, but last month Hastings admitted that it was "pretty clear" that an ad-supported strategy was already working well for the competition, saying: "Those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription. But, as much as I'm a fan of that, I'm a bigger fan of consumer choice."
Recently, streaming rival Disney confirmed that it's adding a new ad-supported subscription to its Disney+ streaming service in the US from late 2022 and is set to expand internationally in 2023. And, in the US, both HBO Max and Peacock also have ad-supported tiers that save customers $5 on their monthly fee, while the ad-supported version of Hulu (owned by Disney) is $6 cheaper than the top tier.
In its recent memo to employees, Netflix noted that HBO and Hulu have been able to “maintain strong brands while offering an ad-supported service”.
“Every major streaming company excluding Apple has or has announced an ad-supported service, for good reason, people want lower-priced options,” the memo says.
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