Tired of paying almost $20 per month for your Netflix (NFLX -0.68%) subscription? Clearly, you're not alone. Shares of the world's largest subscriber-only video on demand (SVoD) platform tanked recently after the company reported some unexpected bad news.
During the first three months of 2022, for the first time in over a decade, Netflix reported subscriber numbers that had declined compared to the previous quarter. There are lots of reasons for Netflix's disappointing decline, but the largest one is a plethora of ad-supported video on demand (AVoD) options from giants like Roku (ROKU -2.39%), Disney, Comcast, and Amazon.
For years, Netflix's charismatic co-CEO Reed Hastings told investors that Netflix wouldn't even entertain the idea of showing ads, and his reasoning made sense at the time. Subscriber cash flows are predictable, which is incredibly useful when you're trying to create heaps of content to keep those subscribers from leaving.
Ad-supported streaming platforms are winning
Unfortunately for Netflix, Hastings failed to appreciate just how much demand for AVoD is out there. Now a plethora of ad-supported platforms, led by Roku, keep eating Netflix's lunch.
Total revenue growth at Netflix has been impressive over the past several years. But as you can see, it pales in comparison to Roku's explosive growth over the past several quarters.
With help from Snowflake and its media data cloud technology, Roku recently launched a "clean room" that anonymizes viewer data so advertisers can target their spending with greater accuracy. In 2021, Roku reported average revenue per user that climbed 43% year over year to $41.03, and that was before advertisers had the benefit of the company's new clean room.
I know that $41.03 per user might not seem like a lot when Netflix costs nearly $20 per month. But remember that free accounts with Roku and other AVoD platforms don't get shared nearly as often, which makes those platforms more attractive to advertisers that want to get the most out of their limited advertising budgets.
Netflix thinks over 100 million households are currently watching Netflix with another household's account. A low-cost ad-supported plan could turn all those freeloaders into a giant source of ad revenue.
When will ads come to Netflix?
During Netflix's first-quarter earnings presentation, Hastings switched his position and told investors that the company was looking at AVoD now and could have something figured out in another year or two.
For Netflix shareholders, another year or two could seem like a lifetime. Netflix lost 0.2 million subscribers in the first quarter and expects to lose another 2 million in the second quarter.
Time to sell?
While this isn't a great time to start a new Netflix position, letting go at its recently depressed price isn't the right move, either. If you've been holding this streaming stock for a while, you've seen it lose around half its value since peaking last November. Letting it go now would only lock in those losses.
The projected subscriber loss management forecast is extremely troubling, but it isn't a good enough reason to cut and run. Netflix didn't adopt an ad-supported business model as early as it probably should have, but I wouldn't worry too much about this company's ability to adapt. Remember, this is the innovative company that ended Blockbuster's dominance of the video rental industry with DVDs by mail before switching gears to build out the world's most popular subscriber-based streaming service.