Netflix has made local headlines recently cracking down on its password sharing policies. This policy entails that all devices have to be connected to a primary WiFi or else pay an additional RM13 fee per user for password-sharing with those living in different households.
This is just one of the many factors that have been worrying investors as of late. But before we get into that, let’s first get to know how Netflix became the most popular video streaming service worldwide.
How Netflix Started
Before the age of the Internet, people were catching up on the latest movies through video cassettes before they were aired on TV. They had to go to their local video rental stores to pick out a movie they wanted to watch, rent it, and then return it once they were done with it. In the US, these were Blockbuster stores.
As technology improved, those video cassettes became thinner and DVDs soon became all the rage. This advancement was a welcomed opportunity for two businessmen: Reed Hastings and Marc Randolph.
They came up with the brilliant idea to post DVDs to customers instead of having them visit a physical store like how they would for Blockbusters.
And that was how Netflix was born.
Simply order the movie that you want to watch then, Netflix will post it to your doorstep. After you’ve watched it, put the DVD back in the envelope provided and drop it off at the nearest post office.
This service garnered a ton of popularity in the US and their business grew quickly.
Internet And Netflix
In the early 2000s, everyone was raving about this new thing called The Internet as it was becoming more easily available. Being the visionaries that they were, Hastings and Randolph quickly jumped on the bandwagon and Netflix pivoted to online streaming by 2007.
They hit the jackpot once more and things skyrocketed for the company. Netflix paved the way for online streaming and consumers were more than happy to pay for its services.
In the next 10 years, Netflix kept growing and wasted no time in spreading its wings. By 2010, it was available not only in the US but in Canada and Latin America too. And over the next few years, they quickly took over the rest of the world. By 2020, their subscriber count was at 203.7 million. Investors couldn’t be more happy with this immense growth but they were in for an unwelcome surprise.
In the first quarter of 2022, Netflix lost 200 thousand subscribers for the first time in a decade. Investors panicked thinking that this was the start of the end for the streaming service. Stocks drastically fell by 35% immediately after the announcement.
In the said announcement, Netflix’s board of directors attributed the loss of subscribers to macroeconomic factors like:
Slowed down adoption of broadband and Smart TV
Increased competition from cable and other streaming services
Password sharing among households
Russia's invasion of Ukraine
This caused the market to become even more cautious when forecasting the company’s following quarter's subscribers count, giving it a -2 million growth for the second quarter of 2022. But what happened next caught everyone off guard.
The Other Side Of The Coin
In Q2, Netflix did not lose as many subscribers as the market predicted but they still lost more than they did in Q1. All in all, in terms of percentage, Netflix lost 0.5% of its subscriber base in the first half of 2022.
While this seems like Netflix is losing steam in their business, as investors, we must bear in mind that the subscriber base only tells half of the story.
The other half of the story is this: the average revenue per user (ARPU).
It is calculated by taking the total subscription divided by the number of subscribers Netflix has. When you plot that in a graph, we can see that the ARPU has been on an uptrend.
Even in 2022 when they were losing a ton of subscribers, their ARPU was still growing from $11.67 per user to $11.76. This means, despite the loss of subscribers, Netflix was still seeing a rise in revenue.
This was how Netflix was playing the game. They had to balance the number of subscribers and ARPU in order to keep the business growing (and investors happy).
Netflix’s Game Plan
After seeing losses in the first two quarters of 2022, Netflix continued to see even more losses going into Q3. This sparked its management team to proactively look for ways to stay ahead of its competitors.
They did this by pilot testing a new plan in 12 countries called ‘Basic With Ads' where for a cheaper price, subscribers can get everything on Netflix but have to watch an average of 4-5 minutes of advertisement for every hour of viewing.
Many were sceptical of this strategy because they claimed that people subscribed to Netflix because it was ad-free. And now with this new plan, they were afraid that it may deter subscribers away.
However, Netflix didn’t see it that way. ‘Basic With Ads’ was a way for Netflix to entice new subscribers to come on board. If they didn’t want to watch the ads, they could just subscribe to the normal plans. And it worked!
Following the launch of the new plan, Netflix managed to add 3.4% of subscribers to 230.7 million.
Then you may be asking, if the new plan is so cheap, wouldn't that lower the ARPU so much that it will affect the revenue?
Quite the opposite actually. Between September 2021 to May 2022, Netflix clocked 1.3 trillion minutes of content watched, making it the most popular platform to stream videos today.
Add that to Netflix’s ability to highly target advertisements to users, the company may soon be able to supplement any loss of ARPU with ad money by advertisers.
But what do you think about Netflix? Do you think they’re a good company to invest in?
If you liked this read, I would like to suggest you to watch a video we made about it on our YouTube channel where we discussed it with even more depth. You can watch it here.