...part of a strategy to recoup revenues and boost growth for the rest of the year
Netflix Inc. will begin cracking down this quarter on US viewers who share someone else’s account after it beat Wall Street earnings estimates for the first quarter but offered a lighter-than-expected forecast on Tuesday when it reported its earnings for Q1.
It predicts that its revenues and growth would even be boosted further by the plans to charge such customers in the second half of the year after previously shifting plans to launch a crackdown on unsanctioned password-sharing accounts into the second quarter,
“We believe it will result in a better outcome for our members and our business,” the company said. Netflix also said it was “on track to meet our full-year 2023 financial objectives.”
The company began rolling out its solution for password-sharing – offering a “paid sharing” option – in 12 countries in February but is delaying expansion. It says it slowed down that action and pursued a more gradual rollout to make improvements, delaying some financial benefits, but said it was pleased with the results so far.
The streaming giant, which revealed a lower-than-anticipated subscriber growth for the first quarter, has been experimenting with measures to limit account sharing in Latin America.
Now that the company is beginning to experience some market saturation and stability, the company would further look to consolidate the growth recorded in Q1 by gradually rolling out more strategies to cut costs and improve user subscription and revenue growth.
“We are growing and we are profitable,” Co-Chief Executive Ted Sarandos said in the company’s post-earnings video interview. “We have a clear path to accelerate growth in both revenue and profit, and we’re executing it.”
The first quarter’s revenue and profitability aligned with Refinitiv’s average analyst predictions. With $8.162 billion in revenue, earnings per share reached $2.88.
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Why Netflix is clamping down on password-sharing accounts
As per Bloomberg, Netflix estimates that more than 100 million people use an account they don’t pay for, and analysts see paid sharing as a large potential source of new customers or sales.
“We value our members and recognise that they have many entertainment choices. A Netflix account is intended for one household,” the streaming company said in January.
The company followed that with a decision to roll out paid password sharing more broadly in the coming months, which was to take effect in the US in the first 3 months of the year, but didn’t. Now it says it will do so in the next couple of months.
Although the rollout is yet to take effect in Africa, there may be great concerns for many users in the continent soon if Netflix decides to go beyond US and Asia. However, Netflix may face a loss in a bid to expand its growth, supposing more users ditch the platform.
In Africa, Netflix had an estimated 2.6 million subscribers at the end of 2021 or just 1.1% of its global subscriber base. The number of Netflix subscribers in Africa is projected to grow to 5.6 million by 2026.
More on Netflix’s Q1 figure
Shares of Netflix dropped as much as 11% in after-hours trade following the report but recovered to gain 1.4%. The company started slowly to 2023 in the first three months after adding 1.75 million streaming subscribers, missing analyst estimates of 2.06 million additions.
The company generated over $2 billion in free cash flow in the first quarter and reported a net income of $1.31 billion. The service added just 100,000 customers in the US and Canada after losing almost 1 million last year. Bloomberg says it lost subscribers in Latin America, a development that could result from the crackdown on password sharing.
As the company has evolved from a high-flying wonder to a middle-aged star hunting for its next big smash, Netflix has had a rocky start to the year for the second year in a row.
The streaming service experienced customer loss in the first half of 2022 and year-over-year customer growth of less than 9 million, the weakest rate since 2011, the year it separated its streaming service from its DVD-by-mail business.
Now, Netflix has stated that the DVD-by-mail business, which is tagged its “red envelope” service, will be shutting down for good. It says it was shutting down its DVD delivery operation, ending its original business after a 25-year run.
“Those iconic red envelopes changed the way people watched shows and movies at home – and they paved the way for the shift to streaming,” Netflix Co-CEO Ted Sarandos said in a blog post announcing the DVD service had entered its “final season.”
The ad-supported tier is another Netflix strategy it has rolled out to help it come out of a dwindling start, which it has experienced two years in a roll. The new subscription tier costs $6.99 per month, $3 cheaper than Netflix’s $9.99 most Basic plan and is set to include 4 to 5 minutes of ads per hour. The plan also comes with some limitations, as viewers won’t be able to download shows for later viewing.
Although it debuted in November, the advertising tier has not yet significantly increased the number of customers. The business has previously stated that while advertising and password sharing will make minor contributions in the year’s first quarter, they will increase over time.