After being a major winner for investors over much of the past decade, 2022 has been a wake-up call for Netflix (NFLX 1.86%). Two consecutive quarters of subscriber losses, coupled with year-over-year sales growth in the single digits, have caused shares to tank this year. The streaming wars have never been hotter, with a seemingly never-ending list of competing services out there vying for consumers' finite attention.
Netflix is fully aware of its challenges, but the business has some worthwhile moves up its sleeve. Here are two key strategies the streaming giant's executive team will deploy in order to boost revenue growth.
Introduce a cheaper, ad-based subscription tier
During the first six months of 2022, Netflix lost 1.2 million customers. Furthermore, sales only increased by 9.8% and 8.6% in Q1 and Q2, respectively, compared to the prior-year periods, a major slowdown from the double-digit gains investors are used to seeing. So, it's not surprising that the biggest takeaway from Netflix's two financial releases this year is that the company needs to find a way to reignite growth.
Management has long turned down the idea of introducing an ad-supporter option on its platform because they believed that it would diminish the viewing experience. However, other streaming services, like HBO Max, Hulu, and Peacock, have already taken this route. And now, it certainly seems like a no-brainer decision for Netflix, which is experiencing a post-pandemic lull.
With 221 million subscribers as of June 30, Netflix undoubtedly has a massive user base, the most of any single streaming service out there, that it can now monetize via advertisements. The company recently announced that it would partner with tech behemoth Microsoft on the endeavor. Netflix's ultimate goal is to make ads on its streaming service that are better and more relevant for consumers than ads on traditional linear TV, while at the same time being more effective at targeting viewers for marketers.
This move can help drive incremental, price-sensitive subscribers to the service, and at the same time, it can generate high-margin revenue from selling ads. The potential result is a larger business that produces greater profits, which shareholders would welcome with open arms.
Netflix plans to introduce the ad-based tier sometime in early 2023.
Crack down on password-sharing
Another important, and obvious, strategy that Netflix's leadership team can do to drive higher growth is by cracking down on the roughly 100 million worldwide households that are currently sharing other accounts' passwords. Similar to the previously discussed move, management hasn't historically been too keen on fixing this problem. But in desperate times like today, when signing up new members is getting increasingly harder, finding ways to add customers by any means necessary is the focus.
Starting in March of this year, Netflix started a program in Chile, Costa Rica, and Peru to try and convert password sharers to paying accounts. Many customers cited how confusing the entire process was, while also pointing out clever workarounds to continue not paying for the service. In July, Netflix started testing a different approach in Argentina, the Dominican Republic, El Salvador, Guatemala, and Honduras.
I don't know if or how long it will take Netflix to monetize the 100 million global households that share passwords, but again, this looks like the correct move right now. In the U.S. and Canada, for example, which is the company's most lucrative region by far with an average monthly revenue per member in Q2 of $15.95, there are an estimated 30 million of these password-sharing households. The untapped revenue opportunity is sizable.
Offering up a lower-cost, ad-supported subscription tier also seems like the perfect move to convert password sharers to paying customers. Instead of these free-loaders completely falling out of the Netflix ecosystem if they are unable or unwilling to pay a higher price, they could turn to the cheaper option in order to continue watching their favorite shows, movies, and documentaries. The cost for Netflix to serve an additional customer is almost nonexistent, so keeping that revenue stream going should be a priority.
While these initiatives might add complexity to the business model, they appear to be natural extensions of the company's evolution. From shipping DVDs by mail to expanding overseas to streaming original content to launching video games, Netflix has always figured out how to pivot when it needs to. Investors should keep an eye on how the company's latest strategies work out, because if they do fare well, Netflix's shares could be headed higher.