Netflix (NFLX -1.54%) has rolled out its upcoming level of ad support as a way to attract more price-conscious consumers. This is an important move for the company, especially as it lost the streaming war. But there are hints that Netflix doesn’t expect this new offering to change its fortunes so quickly.
The spending cap is still in play
Following fiscal Q2 2022 results, Netflix said it expects to spend about $17 billion on content in 2022, and the same again for 2023. Eagle-eyed investors may notice that $17 billion is also the amount streamers spent on movies and shows in 2017. See the article : Streaming in Canada on Prime Video, Crave, Disney+ and Netflix [March 27th]. June to July 3]. 2021. But of course, Netflix in 2023 will be a different monster than Netflix in 2021.
To understand Netflix’s current strategy, it’s a good idea to review the last few years. As the coronavirus pandemic progressed, the world was locked in, forcing everyone to change their lives in quite dramatic ways.
Bars closed, restaurants switched to takeout and delivery only, and Hollywood canceled its scheduled theatrical releases. Streaming services, however, are having a bit of a boom: The industry generated $50.5 billion globally in 2019, rising to $72.2 billion by the close of 2021.
How Netflix arrived at the $17 billion figure
Netflix subscriber numbers increased dramatically during the worst days of the pandemic. The company ended 2019 with 151. This may interest you : Netflix has disrupted the entertainment with Binge Viewing. Can he avoid disruptions himself now?.5 million customers worldwide. That’s nearly 222 million by the time 2022 rolls around.
Awash in extra cash from subscribers — and facing new competition from Disney+ and HBO Max — Netflix has significantly increased its content spend over the years. The company went from spending about $9.2 billion in 2019 to $17 billion in 2021. In essence, $17 billion is a budget to serve a rapidly growing audience base.
Of course, Netflix has stopped developing. In contrast, it has lost subscribers at a heavy rate over the past two quarters, shedding 1.2 million so far this year. Through this lens, spending roughly $17 billion a year seems to keep things steady as the company tries to find new growth.
The ad-tier risk
Netflix’s move to advertising isn’t always an obvious move. Over the years, the company’s founder and co-CEO Reed Hastings has expressed his opposition to such offers, stating that he’s always been a fan of the direct subscription model. On the same subject : 7 tips to recession-proof your business from executives who have been there. However, streamers are now taking to space. However, looking at its content spend commitments, it doesn’t signal much hope that ad levels will soon trigger an increase in subscriber counts.
One concern that Netflix should have is that by introducing a new tier at a lower price, customers will be downgrading their current plan to save a few dollars. It is possible that a sufficient number of existing customers will make such a move that it effectively offsets any increase in revenue from new signups. Needless to say, Netflix will probably see a lot of deck chair shuffling before it sees a significant spike in revenue.
Netflix’s move into the ad-supported arena is really more of a long-term game. Streamers don’t need to increase their spending before the end of 2023, simply because they may experience churn rates. But if all goes well by the start of the 2024 fiscal year, it could be a time to spend a lot of money, once again
Tom Wilton has business dealings with Netflix but does not hold a financial position in any of the listed stocks. The Motley Fool has the position and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. The Motley Fool has a disclosure policy.
Tom Wilton has business dealings with Netflix but does not hold a financial position in any of the listed stocks. The Motley Fool has the position and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. The Motley Fool has a disclosure policy.
