Netflix’s share price tanks after it unveils plan for advertising

Netflix suffered a share price collapse after an unprecedented drop in subscribers prompted it to warn it is considering introducing advertising.

The company said work on the service was still in the early stages but it is expected to follow in the footsteps of other streaming platforms such as Hulu that already offer such payment plans.

At the same time, it is mulling a crackdown on an estimated 100m households who break Netflix rules by sharing their passwords, a practice which is estimated to cost the company as much as $14bn (£10.7bn) a year.

The company is taking drastic action after losing 200,000 subscribers in the previous quarter and warned another 2m could quit over the next three months.

It sparked a plunge in the company’s share price, which dived more than a third on Wednesday to its lowest level in four years, wiping around $50bn (£38bn) off the value of the business.

The move towards providing a cheaper, ad-funded service comes despite previous misgivings expressed by Netflix about the idea.

In 2020 Reed Hastings, the company’s co-founder and chief executive, said he wanted Netflix to be a “safe respite” with “none of the controversy around exploiting users with advertising”.

But Mr Hastings has now claimed that introducing advertising will improve the choice available to consumers.

He said: “Those who have followed Netflix know that I’ve been against the complexity of advertising, and a big fan of the simplicity of subscription.

“But, as much as I’m a fan of that, I’m a bigger fan of consumer choice.

“Allowing consumers who would like to have a lower price and are advertising-tolerant to get what they want makes a lot of sense.

“I think it’s pretty clear that it’s working for Hulu. Disney’s doing it. HBO did it. I don’t think we have a lot of doubt that it works.”

According to Netflix’s most recent annual accounts, the company receives an average of $11.67 in monthly fees from each of its 220m subscribers.

That means that it could be losing out on as much as $14bn per year from the 100m that do not pay full fees to watch the service.

The company is now planning to expand a trial that has been offering some Latin American households the opportunity to share their subscriptions for an additional $3 per month.

If that captured all of those currently piggybacking on others, it could bring in an extra $3bn in revenue.

Analysts criticized the streaming service’s plans to introduce advertising, accusing it of throwing out all of its old rules with no notice.

Michael Nathanson, an analyst at Moffett Nathanson, said: “It’s just shocking. Everything they’ve tried to convince me of over the last five years was given up in one quarter. It’s such an about face.

“They were never able to explain why or how growth was slowing down. Now they’ve decided growth is slowing down. How did this change in two quarters?

Hulu already offers an ad-supported service in the UK, costing £4.55 per month. The ad-free service costs £9.10 per month.

Netflix’s cheapest “basic” subscription costs £6.99 and can only be used on one device at the same time.

Mr Hastings also admitted the company’s rapid growth during the pandemic, when millions of families under lockdown were seeking indoor entertainment, had “created noise” that obscured things happening to its subscriber base.

That masked the growing impact of competitor services such as Disney+ and the rising number of customers who are sharing their password with family members and friends.

He said: “When we were growing fast, it [account sharing] wasn’t a high priority to work on. And now we’re working super hard on it.”

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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