Netflix Q4 Preview: Ad Tier Drove Highest U.S. Sign-Up Rate in Nearly Three Years, Study Finds

Netflix’s new cheaper, ad-supported plan may have given the streaming giant the subscriber-acquisition lift it was hoping for.

Netflix reports fourth quarter 2022 earnings results after the market closes Thursday, and one of the key areas of focus for investors will be the performance of the ad-supported tier ($6.99/month in the U.S.), which debuted in early November in 12 markets.

Prior reports suggested Netflix’s Basic With Ads package was off to a slow start. But new data indicates the launch was a success: Netflix saw its highest daily subscription sign-up rate in the U.S. since the start of the pandemic in April 2020 with the intro of its ad-supported plan on Nov. 3, according to a study released Thursday by research firm Ampere Analysis. Specifically, the streamer’s average daily sign-up volumes increased 58% from Nov. 3-5 compared with the three days prior to the launch, per the researcher.

Since the launch of the ad-supported service, 8% of customers signing up to Netflix or changing their plan have taken the ad tier, Ampere found. Of these, three out of four are new sign-ups — mostly former customers who are resubscribing (64%) with the remainder (36%) representing first-time users. Among Netflix subs who downgraded to the ad-tier, 67% were from the Basic tier, 21% moved from the Standard plan and 12% came from the Premium tier.

Netflix’s Basic with Ads plan “has succeeded at drawing back more price-sensitive Netflix subscribers who had previously churned,” said Ampere analyst Mayssa Jamil. Rather than representing a cannibalization risk to its core ad-free packages, the cheaper $6.99/month plan “will aid customer retention in the long-term,” Jamil said. Ampere’s Subscription Video Economics database tracks daily sign-up and cancellation activity of streaming services in the U.S. based on a panel of “several million” households.

In reporting Q3 earnings, Netflix didn’t provide guidance on how many subs it expected for the ad tier, but the company told investors that Netflix Basic With Ads would not represent a “material” contribution to Q4 earnings. Execs have said they expect the ad-supported package to be neutral or positive in terms of revenue per subscriber compared with its no-ads plans.

At the Variety Entertainment Summit at CES earlier this month, Netflix president of advertising Jeremi Gorman said the company is “pleased with the growth that we’re seeing” in its ad-supported tier since launch. She declined to reveal subscriber numbers but added, “You would be able to see if I was a concerned human — I wear it on my face.”

Overall, Netflix expects a net gain of 4.5 million subscribers globally in Q4, the last forward-looking guidance the streamer will provide on this front. “As discussed in previous letters, we are increasingly focused on revenue as our primary top-line metric,” Netflix said in the Q3 letter to shareholders.

In Q4, Netflix had “healthy viewing hours” based on an analysis of the company’s reported metrics, driven predominantly by significant outperformance from hit series “Wednesday,” Morgan Stanley’s Ben Swinburne wrote in a Jan. 18 note. “Higher engagement likely means lower churn.” Netflix’s share of Top 50 streaming titles across a select number of Nielsen-tracked services also showed “a notable sequential uptick” in November and December, he added. In addition, Netflix mobile app downloads declined only 12% in Q4 globally year over year — suggesting the company could top the 4.5 million sub growth forecast, “assuming modest YoY decline in churn,” according to Swinburne. Morgan Stanley raised its 12-month price target on Netflix’s stock from $275 to $300, based on favorable currency exchange rate trends.

Meanwhile, analysts also will be looking for updates on Netflix’s plan to urge password-sharing households to pay extra for users who are illicitly sharing their accounts. The company said it would launch “a thoughtful approach to monetize account sharing” in early 2023, expanding beyond its initial test markets in Latin America — with signs pointing toward a more honor-system approach rather than a punitive one.

It’s still early days for both of the company’s two new growth initiatives, which “will take time to scale,” UBS analyst John Hodulik wrote in a Jan. 16 research note. Netflix’s password-sharing upsell program “should be revenue accretive but will likely drive churn,” Hodulik noted. “We also expect similar commentary on [the advertising tier] with management’s ‘crawl, walk, run’ approach.”

With Netflix management no longer providing subscriber guidance, Wall Street will focus on revenue and earnings guidance for Q1. On average, analysts expect revenue of $8.15 billion (up 3.6% year over year) and earnings of $2.97/share (-16%) for the first quarter of 2023, according to Refinitiv data.

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