Ahead of Netflix (NFLX)’s third-quarter earnings release, questions about whether the company will discuss altering its tiered pricing strategy are at the top of investors’ minds. Reports suggest that, once the Hollywood actors and writers strikes end, the streamer will raise its prices for ad-free content once more, but the exact pricing plans are still unclear since the actors and the studios have not come close to reaching a deal yet.
Netflix made a major change to its pricing model in May with the crackdown on password sharing, which limited the number of devices and users per Netflix account. This strategy initially had a positive impact: Netflix reported 5.9 million new subscribers in the second quarter, and sign-ups exceeded cancellations following the policy change.
Daniel Morgan, a senior portfolio manager at Synovus, a commercial bank, told Observer that Netflix likely did not fully enforce its password-sharing crackdown in the past quarter. But, he said, standard Netflix subscriptions (with ads) should benefit from continued password crackdowns in 2024, which is important as Netflix continues building out its advertising strategy.
Netflix CFO Spencer Neumann told investors last month that ad plans were still in the “crawl” stage. Today (Oct. 17) at Ad Week New York, Peter Naylor, Netflix’s vice president of global advertising sales, announced the company’s plans for “Binge” ads, which allows users to watch one episode of a series ad-free after they watch multiple episodes in a row. Naylor also said the company would offer two types of sponsorships: live ads to accompany live programming and title sponsorships, where companies partner with movies or TV series and promote themselves within the content. Morgan warns one downside to increasing focus on the standard ad-tier subscription is that users will potentially trade down their ad-free subscription plans for a better deal.
Morgan noted that Netflix increased its free cash flow by making less content during the Hollywood strikes. But saving money may not be the priority, especially as subscriptions have slowed down and competition has increased with other streamers. The company recently announced “The Netflix Cup,” its first live sports event and an opportunity for live ads, and is advertising more mobile games based on original shows like Squid Game and Wednesday, along with reports saying it is looking to license more well-known video games like Grand Theft Auto.
Investors are mostly supportive of Netflix’s prospects in the long term, according to Morgan, even as they’ve adjusted expectations. He said, “Investors should continue to view dynamics as a mixed bag.”
“While all agree the prior outlook for net adds and margins was likely too high, most still see this as a very attractive business over time,” Morgan said.