Netflix (NFLX -0.51%) has pitched its upcoming ad-supported tier as a way to appeal to more price-conscious consumers. It's a critical move for the company, especially as it loses ground in the streaming wars. But there are clues Netflix doesn't expect the new offering will change its fortunes quickly.
The spending cap is still in play
Following its 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 might notice that $17 billion is also the amount the streamer spent on movies and shows in 2021. But of course, the Netflix of 2023 will be a different beast than the Netflix of 2021.
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To understand Netflix's current strategy, it's useful to review the last couple of years. As the coronavirus pandemic took hold, the world locked down, forcing everyone to change their lives in a pretty dramatic fashion.
Bars shut, restaurants transitioned to takeout and delivery only, and Hollywood tore up its theatrical-release schedule. Streaming services, however, experienced somewhat of a boom: The industry generated $50.5 billion globally in 2019, climbing to $72.2 billion by the close of 2021.
How Netflix arrived at the $17 billion figure
Netflix's subscriber figures increased dramatically over the worst days of the pandemic. The company ended 2019 with 151.5 million subscribers around the world. It had almost 222 million by the time 2022 rolled around.
Awash with extra cash from subscribers -- and facing fresh competition from Disney+ and HBO Max -- Netflix ramped up its content spend significantly over those years. The company went from spending approximately $9.2 billion in 2019 to $17 billion in 2021. In essence, $17 billion was the budget to serve a rapidly growing base of viewers.
Of course, Netflix has stopped growing. Instead, it's been losing customers at a heavy rate over the last two quarters, shedding 1.2 million so far this year. Through this lens, spending roughly $17 billion a year seems to be about keeping things steady as the company tries to find fresh growth.
The ad-tier risk
Netflix's move into ads wasn't always an obvious move. For years, the company's founder and co-CEO Reed Hastings has stated his opposition to such an offering, noting he's always been a fan of the straightforward subscription model. Still, the streamer is now climbing into the space. Looking at its committed content spend, however, doesn't signal a lot of hope that the ad tier will trigger an immediate rise in subscriber numbers.
One concern Netflix must have is that by introducing a new, lower-priced tier, it will see customers downgrade their current plans to save a few bucks. It's possible that enough existing subscribers will make such a move that it effectively offsets any revenue boost from new sign-ups. Needless to say, Netflix will probably see a lot of shuffling of the deck chairs before it sees a significant jump in income.
Netflix's move into the ad-supported arena is really more of a long-term play. The streamer doesn't need to crank up its spending before the end of 2023, simply because it will probably experience a degree of churn. But if things settle down by the start of fiscal 2024, it could be the time to spend heavily, once again
