After taking a beating from shareholders after revealing that it lost 200,000 subscribers in the first quarter — the first loss in a decade – Netflix has changed its long-held resistance to a low-cost ad-supported subscription tier.
In an earnings call, CEO Reed Hastings revealed the reversal in the name of "customer choice," promising to offer a commercially-funded tier "over the next year or two."
Hastings' U-turn is a tacit admission that resistance to advertising is no longer tenable in the face of a fiercely competitive subscription landscape and spiralling inflation, as evidenced by the streamer's being forced to raise prices for the second time in 18 months when it increased the cost of its premium plan by £1 to £10.99 across the UK and Ireland.
Inflation is causing families to rethink discretionary spending, according to research by The Trade Desk, with most households considering spending no more than £20 on subscription services. A continuing rise in production expenses is exacerbating the problem, threatening to render Netflix's present business model unsustainable.
As a result of this process, a love affair with streaming has turned into a bitter divorce, with Brits cancelling streaming services in droves.
"After the increase in new joiners during the pandemic lockdowns, the numbers have fizzled," Patrick Morrell, head of strategic publishing and TV development at The Trade Desk, stated. The disruption of its operations in Russia, as well as soaring prices around the world, have had a significant impact on these results, prompting many consumers to rethink their monthly outgoings, as streaming subscriptions are regarded a luxury 'extra.'
"As household finances tighten, ad-supported TV is becoming a more popular option, and it makes sense for streamers to offer it." Discovery is leading the charge with its recently announced 'Ad-lite' package, and Disney has revealed intentions to provide an ad-supported option alongside its conventional paid-for service later this year. In the next 12 months, we expect to see a proliferation of these types of hybrid services across the streaming market — the question is, will Netflix leave its competitors' initiatives unanswered?"
Netflix partly blames its current woes on its exit from the Russian market, which cost it 700,000 customers in one fell swoop, but it expects more losses in the coming months. Netflix has previously launched a crackdown on the estimated 100 million homes that break the password sharing regulations.
When questioned about revenue diversification last month, Netflix chief financial officer Spencer Neumann gave the first public sign that the company was taking a new path, stating "never say never."