A crackdown on password sharing helped Netflix add nearly 6 million subscribers in three months, more than double what analysts had forecast and validating the streamer’s strategy to shore up its business.
After shocking investors by losing subscribers last year, Netflix has responded with two big steps: introducing a cheaper version of its service with advertisements, and trying to limit password sharing, a practice it had largely ignored when growth was high.
Netflix in May cracked down on password sharing for accounts in the US, UK and more than 100 other countries. In the US, Netflix has told customers that if they want to share their password, they must pay $7.99 (€7.12) a month to add a person outside their home, or $6.99 if they are prepared to have an account with adverts.
That policy appears to be working. In the three months to the end of June, Netflix added 5.9 million subscribers, well above Wall Street expectations for 2 million. “The cancel reaction was low,” the company told investors on Wednesday.
However, shares in Netflix, which had gained more than 8 per cent in the five days leading up to the earnings release, dropped by more than 8 per cent in post-market trading after the company reported softer revenue.
Netflix’s quarterly revenue rose to $8.2 billion, up 3 per cent from a year ago but just short of forecasts for $8.3bn. The company predicted that revenue would climb to $8.5 billion in the current quarter, missing analyst forecasts for $8.7bn.
Netflix’s password crackdown reflects the harsh realities of the costly streaming model that it has pioneered. When Wall Street was more keen on streaming, investors looked past the heavy losses companies were enduring, so long as they were able to keep adding subscribers quickly.
But as the wider market has cooled, investors are more focused on profits. Competition has heated up, with Disney and others vying with Netflix for customers.
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Netflix is profitable, while Disney+, Paramount Plus and other rival streaming services are still losing money. Netflix on Wednesday reported quarterly net income of $1.5 billion, up 3 per cent from the same period a year ago.
The company said that it will spend less money this year due to the historic labour strike in Hollywood, which has brought movie and television production in the US to a halt. Netflix now expects free cash flow of $5 billion this year, up from its previous estimate of $3.5 billion.
Many workers have blamed Netflix for ushering in a streaming revolution that has made it difficult for screenwriters to make a decent living. On an earnings call, co-chief executive Ted Sarandos said the strike was “not an outcome that we wanted”, while highlighting his father’s ties to unions.
“On a personal level, I was raised in a union household. My dad was a member of IBEW Local 640, he was a union electrician ... I remember on more than one occasion my dad being out on strike, and I remember that because it takes an enormous toll on your family, financially and emotionally.”
Paolo Pescatore, analyst at PP Foresight, said the results were “a strong endorsement” of Netflix’s password strategy, but cautioned that the crackdown was a “short-term measure”. Netflix “needs to consider its pricing strategy for the mid to long term”, he said.
After tumbling last year, Netflix shares have made a comeback in 2023, gaining more than 60 per cent.
“While we’ve made steady progress this year, we have more work to do to reaccelerate our growth,” Netflix told shareholders in a letter. – Copyright The Financial Times Limited 2023
