Netflix (NFLX 0.91%) started 2022 strong; the streaming company's share price was hovering around $590, thanks in part to a rapid rise in sign-ups over the worst months of the pandemic. But just a few weeks later, investors began to pull away from the company, and the migration became somewhat of an exodus when the streamer announced in April 2022 that it had lost subscribers for the first time in over a decade.
With the year nearing a close, Netflix's stock is down approximately 50%, trading at roughly $290. But the streamer is pursuing some interesting strategies that could show promise in 2023 and beyond.
A bumpy start for its ad tier
Netflix rolled out a $6.99 per month ad-supported tier in early November 2022. Dubbed Basics with Ads, the plan is ostensibly aimed at those who don't mind marketing messages if it means they can get access to most of Netflix's library of shows and movies. And according to some reports, the streamer expects it will attract about 40 million customers by the end of 2023.
Speaking at The New York Times DealBook Summit a few weeks after the ad-supported offering launched, Netflix co-CEO Reed Hastings voiced regret about his previous objections to such a product. "[Disney's] Hulu really proved that you could do [ad-supported streaming] at scale and provide consumers lower prices," Hastings said. "I wish we had flipped it a few years sooner, but we'll catch up, and in a few years we won't remember when we started it."
While Hastings is sounding optimistic about the long-term future of Netflix's ad-based service, there are some indications of an underwhelming debut. According to multiple Digiday sources, Basic with Ads has reached roughly 80% of initially projected audience numbers. Because of this, Netflix is purportedly returning payments to its ad partners for unsold inventory.
NASDAQ: NFLX
Key Data Points
Ready player one
While Basic with Ads might have had less than an auspicious start, Netflix does have another part of its business that it believes will deliver growth over time: video games.
Netflix acquired several video game companies over the last 15 months, including Night School Studio, maker of the popular title Oxenfree. The company has also released dozens of iOS and Android games, offering them as exclusives for its streaming video subscribers.
The smartphone and tablet gaming space is estimated to be worth $152.5 billion this year alone, and so it makes sense that Netflix targeted that sector first. But much like its venture into ad-supported content, the company has seemingly found little success so far. A report published earlier this year found less than 1% of Netflix subscribers had downloaded its mobile games.
Despite the muted interest in Netflix as a gaming company, the streamer is still confident it can make it work. "[W]e believe that the future of television, of films, and games is streaming," said co-CEO Ted Sarandos during the company's third-quarter 2022 earnings call. "And we can only do that by bringing the shows, the films, and games that people love."
Betting on emerging businesses
By moving into ad-supported content and video games, Netflix is ostensibly appealing to potential customers while also helping it firm up its existing user base. Basic with Ads can act as an on-ramp for cost-sensitive consumers, while mobile games serve as a value-add.
But if subscribers continue ignoring these offerings, it's reasonable to ask if either of these strategies will ever work. Or rather, how much will Netflix have to spend on marketing to drive more interest in them?
For investors considering whether to purchase Netflix stock at its current price, the nascent state of its ad-backed content plan and lukewarm response to its video games might well be a reason to hold their fire. But considering the streamer's history of building new businesses from scratch, it might be wise not to bet against it. After all, when Netflix went public in 2002, it made money by renting DVDs to customers by mail.
