Execs discuss ‘an important transition’ for Netflix during Q1 earnings call

During the call, they discussed several recent changes on the streaming platform, notably the introduction of a cheaper, ad-supported subscription offering and a stringent crackdown on password sharing.

Revenue grew 4% year-over-year in the first quarter of 2023 to just under $8.2bn, while average paid memberships increased 4% year-over-year.

Neumann added that Netflix’s current business model generates over $30bn of revenue and boasts healthy profit margins. With 230 million subscribers, the company currently represents about 5% of consumer spend in film, TV and games.

The first quarter closes as Netflix recently boosted its marketing budget by $300m since 2020, and today announced that come September, the company will cease mailing its iconic red envelopes of physical DVDs.

Below are a few key takeaways from the call.

Effects of the password sharing crackdown

Earlier this year, Netflix announced it will release stringent rules against sharing passwords with people outside of a household, marking a stark shift from its initial sharing strategy to recruit members. “This is an important transition for us,“ Peters said. “Very much like a price increase, we see an initial cancel reaction.“

Despite the knee-jerk reaction the company expects from consumers, this move represents part of the company’s plan to grow “in terms of membership and revenue, as borrowers sign up for their own Netflix accounts and existing members purchase that extra member facility for folks they want to share it with,“ he said.

To retain more subscribers, Netflix also recently reduced prices in 116 countries. However, according to Neumann, this currently “represents less than 5% of [Netflix’s] revenue.“ Therefore, the company sees this move as “something that over the long term will hopefully benefit [it].“

The company made this decision after it dropped prices in India from 20% to 60% in 2022. Following that change, neutral revenue growth accelerated from 19% in 2021 to 24% in 2022.

The current state of advertising on Netflix

To counter membership cancelations, Netflix introduced in November of 2022 an ad-supported subscription plan at an entry-level price, called Netflix Basic. This structure is “better for the business,“ as Peters put it. “It sets [the business] up structurally ... to have more members.“

The way Netflix plans to grow its ad model is by generating “content [consumers] can’t live without,“ as Sarandos put it. “We have to keep that up in order to win over those sharing accounts.“

The company is also planning to release better tools for advertisers designed to improve targeting and measurement. ”We’re sort of getting into the ’walk phase,’ [in terms of] scale, said Peters. ”Part of it is the technical features [like] measurement, verification, targeting, programmatic buying… We’re getting into the middle phase of growth… before we get to the ’run’ phrase.”

Although Netflix is only a few quarters into implementing its ad-supported tier, the company is “pleased with [its] per-member ad plan economics,” said Neumann, who added that the tier in Canada is actually higher than its standard plan in the US.

He expects that advertising can represent at least a 50% incremental profit for Netflix. The conservative estimate is largely due to the endeavor still being in ”startup mode.” The company currently has no plans to leverage advertising on its live broadcasts or games.

An update on new consumer products

Sarandos said that consumers can soon expect merchandise, such as shirts and notebooks, inspired by their favorite shows, films and games. The new items are predominantly meant to ”build fandom in a way that can drive revenue but also strengthen the core of [the] business.”

Another fairly new offering for Netflix is gaming. Peters said that the platform currently has 55 games out, the newest of which being Mighty Quest which launched today, and 41 others slated to be released this year.

Sarandos closed out by saying that “We’re really pleased with the quarter. 2023 is off to a good start … We have plenty of room to grow … In revenue and profit, we’re growing – not as fast as we believe we can [and] want to – but we are, profitable.”

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