As Netflix highlighted in its Q1 earnings report, it’s holding off on its widespread rollout of paid sharing until the second quarter. As the company looks to improve the paid sharing feature, it’s also stepping up its capabilities with ad-supported streaming.
Speaking on the company’s earnings call, Netflix’s new co-CEO Greg Peters said the company is taking a “very country specific” approach to paid sharing. Still, the latest launches in Canada, New Zealand, Spain and Portugal were “directionally consistent” with what Netflix saw when it tested the feature in Latin America.
Moving forward, Netflix aims to improve the paid sharing mechanism to ensure subscribers have seamless access on-the-go or while traveling and that the app has “good tools for them to manage access to their accounts and their devices,” added Peters.
The improved version of paid sharing will be launched more broadly in the next quarter, including in the U.S.
Peters described the reaction to paid sharing as “very much like a price increase.” First there is an “initial cancel reaction,” but then borrowers sign up for their own Netflix accounts while existing subscribers “purchase that extra member facility for folks that they want to share with.”
Those results were consistent across the four rollouts in Q1, despite those countries having “market characteristics different from each other.” Peters went on to say in some “price-sensitive” markets, consumers often got to an informal pricing structure by subscribing to a Netflix premium plan “and then sharing us out.”
When that happens, he noted those subscribers often have users pay a fraction of Netflix’s cost “as they are sharing it.”
“We see some of that being shifted off of those plans and having those people sign up for individual plans as we rationalize that structure, implement the changes that prevent password sharing and also have them be able to use things like extra member – or in countries where it’s relevant – the ads plan as a new entry-level price,” Peters said. “I think you are going to see some of that sorting.”
Ad-supported enhancements
Netflix in its earnings release announced it will upgrade its ad-supported tier by offering 1080p video quality and two concurrent streams in all 12 markets where the plan is available, starting with Canada and Spain.
Peters said the upgrades support two goals: to obtain a wide range of consumers and optimize long-term revenue.
“A good example of this is based on the economics of our ads plan, based on the limited switching behavior that we have seen off of standard and premium,” he pointed out.
Speaking more broadly about advertising, Peters said Netflix is leveraging its partnership with Microsoft to improve its go-to market and sales capabilities. The streamer is also rolling out features like measurement and verification to support advertisers, but he noted Netflix has “a bigger, longer roadmap that we have to go do there.”
“You have seen us add programmatic private marketplace that gives advertisers more ways to buy as we grow inventory,” said Peters. “And then we are also trying to improve things on the consumer-facing side.”
The company has stated it’s taking a “crawl-walk-run” approach for the ad-supported tier. And Netflix is now “sort of getting into the walk phase,” according to Peters.
“Obviously, scale is relevant in the business, so we are getting to a certain size of scale that shifts how advertisers think about us,” he explained. Another component is establishing technical features for advertisers, such as measurement, verification and targeting the programmatic buying capability.
CFO Spencer Neumann noted Netflix is building up its advertising business in a way that offers “50% or more incremental profit contribution” to the company. He expects 2023 will be a year of “getting from [the] crawl to walk” phase.
The 50% margin “was really just to highlight the fact that we are still in startup mode of this business and so leaning a little conservative,” said Neumann. Over time, he thinks that percentage will be “meaningfully over 50%,” though he declined to give a specific number yet.
Live streaming strategy
Netflix this quarter jumped into live event streaming with its Chris Rock stand-up comedy special, which aired on March 4. Earlier this week, the streamer pulled the plug on its “Love is Blind” live stream due to technical difficulties, for which Netflix executives apologized on the earnings call.
“We didn’t meet the standard that we expect of ourselves to serve our members,” Peters said, explaining the live stream had a bug that Netflix didn’t see in its internal testing. The bug was introduced after the Chris Rock broadcast, when the company began implementing changes to try and improve the live streaming experience.
“It only became apparent once we put sort of multiple systems interacting with each other under the load of millions of people trying to watch ‘Love is Blind,’” he added. Despite the glitches, Peters noted 6.5 million viewers watched the show.
Netflix’s other co-CEO, Ted Sarandos, remarked a reunion show like “Love is Blind” generates news and buzz, so it “really does play better live when people can enjoy it together.” The Chris Rock stand-up performed well for a similar reason, as viewers anticipated “what he’s going to say in that set.”
“I do think sometimes those results-oriented shows do play out a little bit better on live and they do generate a lot of conversation,” said Sarandos. “But keep in mind, like on Chris Rock, about 90% of the viewing have been after [the event], but it doesn’t change the fact that it was a big event when it happened live.”
Subscriber-wise, Netflix added 1.75 million global subscribers in the first quarter. More information on the company’s user metrics and financial results can be found here.