Netflix revenue numbers disappoint, overshadow subscriber growth

Streaming giant Netflix added 5.9 million new subscribers in the second quarter of 2023. While this is certainly good news for the company, there’s a hitch. Revenue fell short of estimates, leading to share prices tumbling immediately.

The video streaming pioneer has been looking for new ways to make money amid fierce competition with rival platforms and a general subscription fatigue, at least in the US.

Netflix launched a cheaper ad-based tier in November 2022 and soon announced a widespread password-sharing crackdown which is now implemented worldwide.

The good news is that it helped the streaming service add 5.9 million new subscribers during the April-June period, according to numbers released Wednesday, along with the company’s latest quarterly financial results. The gains easily surpassed the roughly two million new members that analysts had been anticipating.

However, investors are clearly unsatisfied. That’s because the revenue numbers continue to be uninspiring – quarterly revenue climbed 2.7% from a year earlier to $8.2 billion, shy of analyst forecasts of $8.3 billion. The company estimated that third-quarter revenue would hit $8.5 billion. Wall Street had been forecasting $8.7 billion.

And while the company added subscribers, it said the average revenue per member fell 3% from a year earlier. That was partly because many of the new sign-ups came from countries where Netflix charges lower prices.

Finally, management commentary in a shareholder letter is also quite concerning. It warned of a “quite competitive battle” continuing to unfold against the backdrop of ongoing strikes by script writers and Hollywood actors in the US. It’s safe to assume that the pipelines feeding content to streaming platforms might get clogged.

Company shares tumbled by nearly 9% in after-hours trading, although the decline could also be explained by some investors locking in profits. After all, Netflix shares have climbed by more than 50% so far this year.

“Consumers have so many amazing entertainment choices – from movies and TV shows to sports and news to gaming and social media just to name a few. We expect that competition will remain intense, including within streaming,” said Netflix.

Disney, Paramount, Apple, Amazon, Youtube, and Warner Brothers Discovery are all indeed focused on growing their streaming revenues. However, in some cases (take Disney) it means cutting back on content and charging higher subscription fees – or offering to watch more ads.

Netflix is not an exception. As part of Wednesday's earnings release, the firm revealed that it's phasing out its cheapest ad-free plan – a service that costs $10 in the US.

Existing subscribers already paying for this basic plan will be allowed to keep it, but new members will only be able to choose the cheaper ad-based tier ($7), the standard ad-free plan ($15.50), or the premium option ($20). The change appears designed to squeeze even more money from viewers.

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