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Netflix to crack down on account sharing, offer ad-laden cheaper options

Streaming giant plans to grow by adding new subscription tier and building up games unit

Following a serious slump in subscriber numbers, Netflix execs are trying to boost financial growth by converting account sharers into paying users and building up its game division.

In its calendar Q1 2022 report [PDF], the streaming giant revealed it lost 200,000 subscribers quarter-on-quarter after it wrongly predicted an addition of 2.5 million. This the first significant drop in subscribers for Netflix in a decade, and more are coming – the company predicted a loss of 2 million subscribers in Q2.

Netflix stock price dropped by around 25 percent on Tuesday to land at the level it was around 2018, before the business soared into its pandemic-induced boost.

Netflix attributed the losses to inflation, the war in Ukraine, and competition from rival services. For the record, rival services saw drops too, albeit less dramatic. Roku stock fell 6 percent and Disney was down 5 percent.

Suspending services in Ukraine and Russia accounted for 700,000 users. Without the unpredictable loss, Netflix would have net positive subscriber growth for Q1, although it would still have fallen short of its prediction.

To counteract the plunge, Netflix plans to convert viewers who share passwords, which it predicts at around 100 million, to paid accounts.

Co-CEO Reed Hastings said on an earnings call that one way to "increase the price spread is advertising on low-end plans," adding that although he was "against the complexity of advertising and a big fan of the simplicity of subscription," he was a "bigger fan of consumer choice." He referred to this new lot of paid consumers as "advertising-tolerant."

Hastings said that this new pricing model would likely appear sometime in the next two years, but that Netflix would outsource the integration of the online ad market, rather than take the task on internally.

"We can be a straight publisher and have other people do all of the fancy ad-matching and integrate all the data about people," said Hastings. "We can stay out of that and really be focused on our members creating that great experience and then again, getting monetized in a first-class way by a range of different companies who offer that service."

The execs did not detail whether that range of different companies includes those who detect ad blockers.

Entry-level paid accounts with advertisements wasn't the only trick up execs' sleeves. Fresh off the acquisition of Boss Fight Entertainment and Next Games, Netflix is seeking to grow its gaming division.

The company launched iOS games for iPhone and iPad in November 2021 and this week added a mobile game paired with a TV series based on a well-known card game called Exploding Kittens.

COO Gregory Peters said the company was open to both building gaming content and acquiring it.

"Our ability to tell stories and build worlds are very consistent with our existing skill set and culture, and we think that we can build a big revenue and profit stream by adding games," said co-CEO Theodore Sarandos.

Even with all the doom and gloom of lost subscribers, Netflix revenue was up 9.8 percent year-on-year to $7.867bn, and reported a net profit of $1.796bn, down from $1.8587bn a year earlier.

Looking ahead, CFO Spence Neumann: "During this period of slower revenue growth, we're going to protect our operating margins, roughly in line with what we guided to for this year." He added a caveat that for the next two years, Netflix would be operating at the same margin.

"We have high confidence that we will accelerate revenue," said Neumann. "When we do, we also have our commitment to continue to gradually grow our operating margins. But let's first get our revenue growth reaccelerated, and then let's talk about the pace of that margin acceleration."

Veteran tech analyst Richard Holway, Chairman at TechMarketView, said this morning of Neflix's dilemma:

"I can't see this situation improving. The major cost of living crisis in the UK means many are examining all their expenditure. Streaming is rather easier to give up than heat and food. On top of that the C-19 restrictions have eased and the days are getting longer and warmer. Maybe, just as we saw 'Peak Facebook', we have already seen 'Peak Netflix' too." ®

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