Netflix has always been adamant about not having ads on its platform through the years. But now, they’re going to introduce a new plan with ads that’s cheaper than the basic plan.
Why’s that? Before we go there, let’s look at the streaming and subscription business model that made Netflix what it is today.
Streaming and Subscription
Netflix created the streaming platform segment when the world was still on DVD rentals. And it also made service subscriptions mainstream, where Netflix has become another monthly bill. It changed how people consume content by conditioning users to things like binge-watching, and suggested content.
It worked quite well all these years since the monthly fee was way cheaper than say a movie rental or a theatre visit. And it is not just one movie, but an extensive catalog of movies and TV shows, watchable without any restrictions all through the month.
And Netflix kept on revamping its subscription plans, adding additional features like higher video quality, multiple devices, for a higher fee. This cast a wider net to get subscribers from different segments. Someone who prefers watching on their phones may go for the basic plan while someone who watches on a large screen or in a social or family setting, goes for higher plans with Full HD viewing.
So Netflix continued to grow and also started producing its own content of movies and TV shows. So its catalog kept on expanding even more.
They also expanded into multiple countries and regions and acquired rights to movies and shows in those local languages.
And this is also reflected in Revenue and Share Price. Its revenue grew almost every single quarter consistently. It went from a revenue of 1.6 Billion USD in 2009 to around 30 Billion USD in 2021. The share price went from a mere $5 in 2009 to $700 in 2021 at its peak.
The COVID Catapult
Netflix has seen humungous growth in new user subscriptions and viewership metrics during COVID, all thanks to lockdowns that forced people to stay at home. So the majority of the population spent an increasingly larger amount of time on Netflix. While many industries struggled and companies went bankrupt, Netflix has only grown higher.
So what went wrong for them to launch an ad plan?
Subscribers leaving in droves
People had lots of free time on their hands owing to lockdowns, so they spent it on Netflix. But all this changed as things started to open up, so the time spent has reduced. And people who subscribed during COVID started canceling their subscriptions as they started going to work.
Netflix has lost around 1.2M subscribers in the first 2 quarters of this year. And its stock price plummeted around 65% just this year.
Netflix also jacked up prices significantly over the years as it had well-established brand value and near monopoly. This also contributed to people leaving, as it has become more expensive, while it was cheaper than TV Cable before.
Even though Netflix had the first-mover advantage which kept them as the dominant market player for a while, things started to change when other streaming platforms started popping up. Almost every Hollywood studio realized streaming is very lucrative and wanted a piece of the pie, so they started launching their own streaming platforms.
This affected Netflix in two ways. Firstly, they started losing market share to these new platforms. Secondly, they also have to give up content licensed from these production studios. For example, Pirates of the Caribbean movies produced by Disney were on Netflix, but they were pulled out once Disney+ was launched in 2019.
Growing expenditure of In-house content
To counter the above problem of the movie rights issue, Netflix began making its own movies and shows. But movie making is expensive, even for a smaller film or a show. Also, it is difficult to recoup the costs quickly when released directly on streaming.
For example, when Walt Disney Studios makes a movie, they release it in movie theatres and they get revenue, right from Day 1. But in streaming, you don’t see that as the movie isn’t sold separately. The revenue is passive and takes quite a long time to just break even.
Sharing a Netflix account is quite common, but this turned out to be a massive headache for them. More than 100M users watching on Netflix are not actual subscribers but using someone’s account. That’s potentially a lot of revenue loss for Netflix.
Netflix is not just competing with other streaming platforms like Disney+, and Prime Video but also with free video-sharing platforms like YouTube, Instagram, and TikTok. These platforms are able to keep it free through ads, so the adoption and retention have always been higher. Also, the number of videos on these platforms is endless and ever-increasing.
Besides, some streaming platforms like Peacock and Paramount+ also have a free ad-based plan. This helps quite well in user acquisition.
With all these factors taken into consideration, Netflix is finally going the ad route.