Netflix’s Quarterly Report: Bad! Also: Ads?

Illustration: Martin Gee

Update, 7:30 p.m.: A McDonald’s ad during an episode of Stranger Things? It won’t happen right away, but Netflix execs Tuesday all but announced an advertising-supported version of the streamer is in the works.

Company founder and co-CEO Reed Hastings made the shocking announcement Tuesday while being interviewed for a quarterly earnings call. Conceding that he historically had “been against the complexity of advertising” on Netflix, he said it was now clear many consumers wanted the option to pay less in exchange for seeing ads. “I’m a fan of consumer choice,” the exec said. “And allowing consumers who would like to have a lower price, and are advertising-tolerant, get what they want, makes a lot of sense. So that’s something we’re looking at now.”

Hastings said the company would begin internal discussions about how to include advertising on the service over the “next year or two” before making a final decision. But he left very little room for doubt that he was ready to do what even six months ago seemed unthinkable. “Think of us as being quite open to offering even lower prices with advertising as a consumer choice,” Hastings said.

Original story: For the first time in more than a decade, Netflix said it lost subscribers in a quarterly earnings report — 200,000 of them, to be exact. Across the U.S. and Canada, it lost 640,000 subscribers, and saw additional losses in every other region except for the Asia Pacific market, where it added one million subscribers.

It’s another black eye for the company that pointedly did not win the first Best Picture Oscar for a streaming film and that also faces stiff competition in the streaming space, a steep inflation curve, and the end of a boom brought on by pandemic lockdowns. Not great, to put it mildly, and despite the company citing those reasons (alongside pesky password-sharing, which Netflix is already cracking down on) for its struggles in its quarterly report, its stock has already lost one-fourth of its value in after-hours trading.

As bad as the top-line numbers are for Netflix — and make no mistake: They’re bad — there are some caveats worth keeping in mind. For one, Netflix would have gained subscribers globally had it not been for its decision to suspend operations in Russia. That move cost it 700,000 subscribers, which was the difference between a net addition of 500,000 subs and the actual result of a 200,000 loss. But even so, Netflix had cautiously forecast an addition of between 2.5 million and 4 million customers for the quarter, so even an adjusted growth of 500,000 subs is just one-fifth of the lowest end of the company’s already pessimistic projection from January. That dire forecast three months ago sent Netflix stock tumbling, so it’s no wonder that the actual results coming in even worse appeared to prompt further investor panic, at least initially.

There are other factors dragging down Netflix subscriber numbers. It raised prices in the U.S. and Canada during the first quarter and has raised them in some other countries as well over the past six months. It also estimated that as many as 100 million households globally — and 30 million in the U.S. and Canada — are sharing accounts. And as the company noted in a letter to investors, “sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from COVID are likely having an impact as well.”

It will be interesting to see if those headwinds cause slower growth for other streaming companies, but for now, some of its rivals aren’t hiding their mild glee in seeing streaming’s 800-pound gorilla take it on the chin. One executive at a competing company offered a three-emoji text in response to news of Netflix’s negative growth: “🤣🤣🤣.”

Netflix’s Quarterly Report: Bad! Also: Ads?