Netflix (NFLX 2.47%), along with many of its streaming rivals, demonstrated tremendous growth over 2020 and 2021, but last year was sobering for the company as the world mostly recovered from COVID-19 lockdowns. For the first time in more than a decade, Netflix lost subscribers, leading to a sharp decrease in its stock price.
The streamer reacted swiftly, announcing an ad-supported plan and making a commitment to crack down on password-sharing. But despite these efforts, Netflix's shares are still down almost 40% from this time last year.
That's not the entire story, and savvy investors know the company has some bold strategies to unlock future growth. Let's take a look.
Early ad struggles
Netflix rolled out its ad-supported tier in Nov. 2022. Dubbed Basic with Ads, the $6.99-a-month plan lets users watch most (but not all) of the company's content library with the occasional ad.
Before it launched, Wall Street was broadly optimistic about Basic with Ads. Evercore ISI analyst Mark Mahaney cited the product's relatively low price as a positive, while John Blackledge of Cowen projected the tier could see Netflix adding 4.3 million subscribers in 2023. But since its arrival, there are signs Basic with Ads is not the immediate hit many had expected.
According to analytics firm Antenna, just 9% of new Netflix sign-ups in Nov. 2022 opted for Basic with Ads. And if a report from Digiday is to be believed, the streamer has returned money to some of its marketing partners because not enough people are viewing ads on its platform.
The on-ramp strategy
Speaking during a panel event at the recent Consumer Electronics Show in Las Vegas, Jeremi Gorman, Netflix President of Worldwide Advertising, suggested the streamer is unconcerned with Basic with Ads sign-up rates. "[W]e're pleased with the growth we're seeing," noted the executive, without disclosing numbers.
At first blush, Gorman's words could be read as public relations-speak, intended to gently push back against the reporting about Basic with Ads without directly refuting it. But there could also be another perspective: Perhaps Netflix is "pleased with the growth" because it views the ad tier as a feeder for its higher-cost plans.
As things stand, Basic with Ads limits users, only allowing them to watch content on a single device at any one time -- something that can prove challenging when there are multiple people in a household. Netflix's higher-cost Standard and Premium tiers don't have such restrictions, and they also allow users to view higher-quality streams as well as download content for offline viewing --- features all missing from Basic with Ads.
Playing the long game
Some market watchers have floated the possibility that Basic with Ads could cannibalize Netflix's other plans, encouraging users to transition to the cheaper offering. But as Netflix Chief Operating Officer and Chief Product Officer Greg Peters explained on the company's third-quarter earnings call, that's a risk the streamer is comfortable with.
"We're trying to take a pro-consumer approach and sort of let [customers] find and land on the right plan for them," noted the executive. "[T]he economics and the revenue will be fine as a result, even if some of those consumers switch plans."
Netflix's seeming ease with the Basic with Ads adoption rate and the potential threat to its other tiers should provide stakeholders with some comfort. Even if some of the streamer's 223 million customers do move over to Basic with Ads, that should boost its standing with marketers as more people are seeing ads. And as those ad views go up, Netflix can thereby increase the rates it charges advertisers.
The company hasn't revealed the sign-up number for Basic with Ads, so that will be something for investors to look out for when the company publishes its fourth-quarter results on Jan. 19. If Netflix shares those figures -- and they're better than reports have indicated -- investors can have more confidence the company is starting to figure out the ad-supported space, and just how to turn it into a real long-term revenue driver.
