Can advertising help Netflix bounce back?
Whereas netflix (NASDAQ:NFLX) flourished for many years before 2020, the pandemic – which forced people to stay indoors and find ways to be entertained – was a major boon for the company. But recently, as economies reopen and things return to normal, the company has struggled to achieve the impressive growth to which shareholders are so accustomed.
This best streaming stock must find a way to straighten out its prospects, and advertising could be the answer.
Netflix faces a new reality
It was widely reported that due to the shutdown of its service in Russia, Netflix ended up losing 200,000 subscribers in the first three months of 2022 (compared to another 500,000). And the management team, led by co-founder and co-CEO Reed Hastings, predicts the loss of 2 million more customers in the second quarter just ended.
Investors were used to seeing Netflix add 25-30 million members a year, so it’s no surprise the unfortunate turn has sent the stock plummeting, with shares having fallen 70% so far this year.
Several factors are involved. The coronavirus pandemic has caused a seismic shift in consumer behavior that has driven demand forward, and Netflix now faces a strange time when it’s hard to gauge quarter-to-quarter numbers. In the first quarter, revenue jumped 9.8% year over year, the slowest growth since the fourth quarter of 2012. And in the second quarter, sales are expected to increase only 9.7% . For what has traditionally been called top growth stock to own, these numbers are nothing to get excited about.
Then there’s the fierce competitive nature of the battle for viewers’ eyeballs. A number of direct rivals, such as waltz disneyit’s Disney+, Discovery of Warner Bros.from HBO Max, and Amazon Prime Video is gaining traction. And with the economic reopening, people are likely inclined to leave home more often for leisure and entertainment activities.
Netflix’s recent setbacks have resulted in a significant change in tone from the management team, which must pull out all the stops to drive growth and please shareholders. Having previously rejected the idea of sell advertisements on the service because they thought it would ruin the Netflix experience, executives now plan to introduce a cheaper, ad-supported tier by the end of this year.
And his exactly the right decision the company needs to make now.
Selling ads could be the answer
While Netflix should have introduced a low-cost, ad-supported option years ago, better late than never. Competitors have already sold ads and succeeded in doing so. “I think it’s pretty clear that this is working for Hulu,” Hastings said on the first quarter earnings call. “Disney does it. HBO does it. I don’t think we have much doubt that it works, that all of these companies have it figured out.”
It’s an incredibly easy argument to make as to why Netflix should pursue this strategy. For starters, the lucrative region UCAN (US and Canada) appears to have plateaued, losing 640,000 subscribers in the first quarter. A cheaper option could help attract price-conscious consumers who have been on the fence. And in international markets, where Netflix has a huge opportunity for expansion, developing countries with low per capita incomes would welcome an ad-based version of the service if it meant they could watch a huge library of content.
Here’s what might also help. In its first quarter shareholder letter, Netflix highlighted 100 million households worldwide that are share passwords from other accounts. As society cracks down on this discouraged behavior, instead of these viewers leaving Netflix altogether, many might choose the less expensive, ad-supported tier.
This move will undoubtedly help the company attract more subscribers in an increasingly competitive industry, which generates more revenue. And that ultimately allows Netflix’s flywheel to spend massive amounts of money on content. Scale matters in streaming, and selling ads to keep growing ensures that Netflix won’t lose that edge.
And instead of strictly operating a business model that invests tens of billions of dollars each year to create exclusive content to sell to viewers, Netflix is now monetizing its valuable 222 million subscriber base to sell to advertisers. According to data from Nielsen Holdings, Netflix accounted for 6.8% of total television viewing time in the United States during the month of May. This is prime “digital real estate” that can be sold to marketers, becoming an important revenue driver for the company in the future.
For a title that has been completely crushed, this strategic pivot, which has the potential to improve the fortunes of the company, is exactly what Netflix shareholders need right now.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Neil Patel holds positions at Amazon. The Motley Fool holds positions and recommends Amazon, Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: Long Calls January 2024 at $145 on Walt Disney and Short Calls January 2024 at $155 on Walt Disney. The Motley Fool has a disclosure policy.
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