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Netflix Is Testing a Freemium Model

By Evan Niu, CFA – Sep 1, 2020 at 8:00AM

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The video streamer is giving away some of its most popular originals to attract subscribers.

Dominant video streamer Netflix (NFLX 0.94%) is testing a new approach to attracting subscribers: Offering free content to give prospective customers a taste. The move comes after the company earlier this year temporarily offered U.S. residents free access to watch To All the Boys I've Loved Before, a teen rom-com, in an effort to get people to subscribe to watch the sequel.

Can the new strategy reinvigorate subscriber growth?

Netflix interface displaying series and movie content

Image source: Netflix.

Hoping to get consumers hooked

"We're looking at different marketing promotions to attract new members and give them a great Netflix experience," a Netflix spokesperson told various outlets on Monday. The list of free content includes both original movies and TV shows, with just the first episode of shows being available to hook consumers. Here's what the streaming tech company is giving away:

  • Stranger Things (series)
  • Murder Mystery (film)
  • Elite (series)
  • The Boss Baby: Back in Business (series)
  • Bird Box (film)
  • When They See Us (series)
  • Love is Blind (series)
  • The Two Popes (film)
  • Our Planet (series)
  • Grace and Frankie (series)

You might notice that Netflix is including some of its biggest engagement hits, leveraging some older titles that are probably nearing the end of their shelf life. Bird Box grabbed over 45 million views within the first week after it was released in 2018, and last year's Murder Mystery was watched nearly 31 million times in the first three days. Stranger Things is a household name.

Borrowing from Spotify's playbook

Unlike other content streaming services that offer a free tier -- such as Spotify (SPOT 0.74%) -- there won't be any ads. That makes sense since the content itself is an ad for the streaming service and Netflix has long refused to run ads. There's a lot of cross-pollination between Spotify and Netflix, with current and former Netflix executives serving on Spotify's board, so it's unsurprising to see the companies borrow from each other's' playbooks.

Spotify has been investing heavily in original podcast content that it includes for free in the ad-supported service, which Bernstein analyst Todd Juenger recently argued breaks the Spotify-Netflix analogy. But Netflix is now using a strategy similar to Spotify's, so maybe the comparisons aren't that misplaced.

Netflix subscribers have surged amid the COVID-19 pandemic as demand for home entertainment is booming. The company believes that the public health crisis has pulled demand forward, and accordingly forecast relatively modest subscriber growth for the rest of the year. After adding nearly 26 million paid memberships in the first half of 2020, Netflix's guidance calls for just 2.5 million paid net subscriber additions in the third quarter.

With subscriber growth expected to decelerate, giving users a free test drive is one of the levers that Netflix can pull to bolster demand.

Evan Niu, CFA owns shares of Netflix and Spotify Technology. The Motley Fool owns shares of and recommends Netflix and Spotify Technology. The Motley Fool has a disclosure policy.

Stocks Mentioned

Netflix Stock Quote
Netflix
NFLX
$308.42 (0.94%) $2.86
Spotify Technology Stock Quote
Spotify Technology
SPOT
$75.72 (0.74%) $0.56

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