After spending its first decade plus loudly proclaiming that it would never stoop to allowing advertising on its platform, last year Netflix decided that, come to think of it, maybe a few ads wouldn’t hurt.
Netflix shares famously had their worst year ever in 2022, dropping by 60%, making it the fourth-worst performer in the Nasdaq 100 Index. At one point it had shed more than $50 billion off its market cap in April.
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To be fair, Netflix (NFLX) did manage to add 7.66 million paid subscribers during the last quarter, which was more than the 4.57 million Wall Street expected.
How many of those new subscribers were people who enjoyed the “Wednesday” dance sequence that went viral on Tik-Tok? Did Jenna Ortega save Netflix? We just don’t know.
But we do know that Netflix’s status as the all-powerful king of streaming is starting to look a bit wobbly, especially as Disney’s trio of Disney+, Hulu and ESPN’s combined total of 221 million customers at the end of its 2022 third quarter beat out Netflix's subscriber count of 220 million for the same period.
Netflix’s Has Finally Relented On Advertising
There’s no one single answer for why Netflix is seeing a downturn of late, but there are several reasons why it’s likely struggling.
Nearly every studio, save Sony, has launched a rival streaming platform. This is causing more competition for the viewer. In addition, platforms such as Comcast’s Peacock have begun to pull catalog hits such as “New Girl,” away from Netflix to have on their own service.
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As inflation continues to roil the economy, consumers have reasonably decided they can’t subscribe to every streaming service, so they’ve had to make some cuts, and are turning to the model where they subscribe to one or two services for a month, and check out whatever they are interested in before moving on.
There’s also a lingering sense that, at this point, Netflix has hit its natural ceiling for customers, and that everyone who was ever going to subscribe to the service has already checked it out by now.
It’s also the case that Netflix’s approach to making shows and movies, which is just to make a bunch of stuff in hopes that a few things will catch on, is now bringing about diminishing returns.
Netflix Basic With Ads launched in the U.S. on November 3rd, with the idea being that maybe a cheaper service (with fewer options) could bring more people on board, and the ads could generate some needed revenue. But after a few months, it seems the company may start retooling its advertising approach.
Netflix
Netflix Might Rethink Its Advertising Partner
Last summer Netflix announced that Microsoft (MSFT) would be its global advertising technology partner. But now it's reportedly open to finding a new partner after its two year contract expires. The company has signaled that it also might decide to renew with Microsoft, or even possibly go it alone and take care of advertising in-house.
The streaming media giant has reportedly retained former Comcast chief product officer Jon Whitticom as an advisor on how best to proceed with its advertising ambitions, according to Digiday.
Netflix didn’t have much experience developing TV shows until it started developing TV shows, and it might take a similar approach to ads, as it has indicated that it might build its own advertising technology, including an ad server, or it might acquire the technology from a third party.
On a recent earnings call, COO Greg Peters said the Microsoft partnership was working, but there was room for improvement.
"We’re crawling and we’d like to get to sort of move to the walking phase," said Peters. "We’ve got a lot to do to get there. So there is a bunch of technical improvements in terms of ad delivery validation, measurement. We’ve got progress already on that, more to do in the next quarter or two."
