Netflix added 6 million new subscribers in Q2 2023, a big improvement from the one million loss in Q2 2022. But was the gain due to the introduction of paid sharing?
With Netflix’s Q2 2023 results, we get our first look at the impact of the company’s paid sharing measures. But the picture is complicated by the introduction late last year of the cheaper ad-supported plan.
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Comparing Q2 2023 performance to Q2 2022 (2:00)
Compared to Q2 2022, Netflix performed better in the quarter just ended. The company added 5.9 million new paying subscribers worldwide in Q2 2023 to reach 238.4 million. It has added almost 18 million over the last year. The two biggest regions where paid sharing was introduced were EMEA (Europe, Middle East, and Africa) and UCAN (United States and Canada.) EMEA added 2.5 million subscribers in the quarter, and UCAN added 1.2 million.
So, global subscribers grew by 3% in the quarter, and UCAN and EMEA grew about the same.
How does that compare with Q2 2022? Worldwide subscribers fell by about half a percent, with EMEA down by 2% and UCAN down by 1%.
Did paid sharing cause a surge in subscribers? (3:20)
As I said in my piece from January of this year, Netflix prepared well for the introduction of paid sharing. Adding the cheaper ad tier gave borrowers easy entry into a paid membership. The ability to transfer viewing behaviors to a new account was also very helpful.
That said, it could be argued that some of the 5.9 million gain was from the ad-tier introduction alone. However, in the Q2 2023 earnings call, co-CEO Craig Peters said the number of people on the ad tier remains relatively small. So, it looks like most of the 5.9 million gain came from paid sharing, and most signed up for the ad-free tier. That could change, but we’ll get to that in a moment.
So, since Netflix lost subs in Q2 2022, I think it’s fair to say paid sharing caused a surge of more than 5 million new subscribers.
Is this all there is? (5:00)
Assuming all the gain came from paid sharing, how did Netflix do? The company states that globally 100 million households are using credentials borrowed from someone else to access the service. They say that 80% of members are covered by paid sharing, and they rolled it out to the rest on Wednesday. So, 5.9 million of 80 million is about 7%. They have so far captured about 7% of the people who face paid sharing.
However, it is very early days. According to Craig Peters:
“It’s not an overnight thing because, in part, the interventions are applied gradually, and in part because some borrowers won’t immediately sign up for their own account. They will do so next month or three months or six months or maybe even longer down the line as we launch a title that they are particularly interested in.”
The people that converted first were the most engaged account borrowers, who watch it a lot and value it. Those people are an easy sale. The rest will be won over, one show at a time.
Is there a big revenue windfall? (7:30)
Netflix stands to benefit from two new revenue streams due to paid sharing. The first is the growth in subscribers, and the second is people paying for another family member. In the US, it costs $8 a month per extra household. So, did the company see a big spike in revenue due to the 5.9 million new members and an unknown number of paid sharing plans? No, it did not. Revenue was flat from Q1 2023 and only up 2.8% from Q2 2022. Moreover, average revenue per member (ARM) continues to drop slightly. Overall, it fell 2% quarter-over-quarter and is down 5% since Q2 last year.
The company said that since paid sharing was introduced late in the quarter, the company didn’t benefit much from the revenue. However, that seems odd since Netflix no longer offers a free trial and asks people to pre-pay for a month’s usage. UCAN’s revenue fell about $9 million despite adding 1.2 million new paying customers.
That said, Netflix CFO Spencer Neumann is confident the revenue surge from paid sharing will come:
“It is our primary revenue accelerator in the year, and we expect that impact, as Greg said, to build over several quarters.”
Clouds on the paid sharing horizon (10:40)
Some clouds on the horizon could spoil the success of paid streaming. The most obvious is the writer’s and actor’s strike. Netflix relies on new popular programming to help recapture the account borrowers that have sat on their hands so far. If the strike drags on, the flow of new US content should dry up sometime in the new year. Will content produced outside of the US be able to fill the gap? Probably not in the US, and maybe not elsewhere.
On the strike, Netflix executives were tight-lipped. Co-CEO Ted Sarandos tried to strike a sympathetic note, saying he grew up in a union household.
“There are a handful of complicated issues. We’re super committed to getting to an agreement as soon as possible. One that is equitable and one that enables the industry and everybody in it to move forward into the future.”
But listening to SAG-AFTRA president Fran Drescher, it sounds like the two sides are still very far apart.
Another problem is that the cost of watching Netflix ad-free has jumped dramatically. The company has decided to eliminate its lowest price ad-free tier. The tier costs $9.99, just $3 more monthly than the ad tier. From now on, new subscribers must pay $8.50 more per month to watch ad-free, the highest price difference for ad-free viewing in the industry. Greg Peters brushed over this issue, saying more new subscribers will opt for the ad-supported plan. However, it could be that many prospective subscribers looking for a premium, ad-free experience might not subscribe at all.
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