Netflix stock dropped by more than 25% in after-hours trading, after the company additionally forecast it could lose 2 million subscribers in the second quarter.
In a pre-recorded earnings conference call, Netflix co-CEO Reed Hastings said that adding a lower-priced option with advertising on the platform “makes a lot of sense.”
This comes as Netflix stock plunged more than 25% after hours on news that the company lost 200,000 subscribers in the first quarter of this year – marking the streaming platform’s first decline in paid users in more than 10 years. It additionally forecast that it could lose as many as 2 million subscribers in the next quarter.
“Those who have followed Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscription,” said Hastings. “But as much as I am a fan of that, I am a bigger fan of consumer choice and allowing consumers who would like to have a lower price and are advertising tolerant to get what they want makes a lot of sense.”
The company said that it would place greater emphasis on content creation to draw more users. “On the content side, we’re doubling down on story development and creative excellence.”
Netflix previously said it expected to add 2.5 million net subscribers during Q1, while analysts predicted subscribers would be closer to 2.7 million. During the same period last year, the company added 3.98 million subscribers.
The globally popular streaming platform said that growing competition from recent streaming launches by traditional entertainment companies, along with password sharing, the ongoing Russian invasion of Ukraine, and inflation all contributed to the recent loss of paid subscriptions. Suspending service in Russia after the Ukraine invasion resulted in the loss of 700,000 subscribers the company reported.
“Our revenue growth has slowed considerably,” it said in a letter to shareholders Tuesday. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds.”
Netflix estimates that account access is being shared with more than 100 million additional households through account sharing.
“Our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds,” Netflix said in its letter.
“Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets — an issue that was obscured by our COVID growth.”
Netflix, which currently has 221.6 million subscribers, is forecasting a global paid subscriber loss of 2 million for the second quarter – making the option of offering an ad-driven version all the more appealing.
“It’s pretty clear that it’s working for Hulu. Disney is doing it. HBO did it,” Hastings said. “I don’t think we have a lot of doubt that it works.”
Netflix offered no specific outline as t when or how advertising would be phased in on the platform.
While the company’s revenue grew 10% to $7.8 billion, Netflix said that its revenue growth had “slowed considerably.”
