Netflix reported its Q4 2022 financial results yesterday, topping 230 million global subscribers, up from 223.09 million, thanks to the addition of 7.7 million subs. During the earnings call, Netflix co-CEO Ted Sarandos said the company is “keeping an eye” on a free ad-supported TV (FAST) option, a move that many media companies are considering as more consumers shift to FAST services.
“We're open to all these different models that are out there right now, but we've got a lot on our plate this year, both with the paid sharing and with our launch of advertising and continuing to this slate of content that we're trying to drive to our members. So, we are keeping an eye on that segment for sure,” Sarandos said.
While a Netflix FAST channel offering probably won’t happen anytime soon, Sarandos isn’t dismissing the possibility that there’ll be one in the future. When and if Netflix goes through with a FAST option, the move will most likely boost its ad business significantly. According to nScreenMedia, the FAST industry will reach 216 million monthly active users in 2023, driving $4.1 billion in ad revenue.
Netflix is known to be slow to follow industry trends. It took many years for former co-CEO Reed Hastings, who just announced he would step down, even to consider launching a cheaper ad-supported plan. Hulu is the third-oldest streaming service next to Netflix and Amazon Prime Video (formerly Amazon Unbox) and has offered an ad tier for over a decade.
Netflix is counting on its ad business to be a big source of income. Overall, it estimates $8.17 billion in revenue for Q1 2023.
However, it’s looking like Netflix’s “Basic with Ads” plan isn’t paying off as much as it anticipated, according to a recent Kantar report. Despite being satisfied with the growth of its ads business, which Netflix President of Worldwide Advertising Jeremi Gorman noted during an interview at Variety’s Entertainment Summit at CES, Kantar data shows that Netflix “Basic with Ads” now accounts for 12% of its subscriber base. Although Netflix intended for the new tier to entice new subscribers, it appears only a few current customers traded down to the $3 plan.
In the letter to shareholders yesterday, Netflix wrote that the launch of its ad-supported tier was successful; however, the company admitted it had “much more still to do.”
It’s likely that more subscribers will consider the cheaper tier when the company adds all its content to the plan. As of now, 85% to 95% of Netflix’s content is available. The company is currently renegotiating deals with studios.
Also, the ad tier is not available in every region. “Basic with Ads” is only available in the U.S., the U.K., France, Germany, Spain, Italy, Australia, Japan, Korea, Brazil, Canada and Mexico. The company has no immediate plans to expand, but it has future plans to target larger ad markets.
Netflix CFO Spencer Neumann said in yesterday’s earnings call, “We wouldn’t get into a business like this if we didn’t believe it could be bigger than at least 10% of our revenue and hopefully much more over time in that mix as we grow.”
Overall, the company admits that “2022 was a tough year,” Netflix wrote in its letter to shareholders. The streaming giant had two painful quarters in 2022, losing more than a million global subscribers.
In Q4, the company reported $7.85 billion in revenue, adding to its recent trend of slowing revenue growth. For comparison, the company brought in $7.93 billion in Q3 2022 and $7.97 billion in Q2.
“We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering,” the company added in yesterday’s letter.