A lot has changed about Netflix (NFLX -0.63%) over the years. In the early days of streaming, users were encouraged to share the love -- and their password -- in the hopes of drumming up additional interest in the service. In 2017, Netflix posted on X (then Twitter), "Love is sharing a password."
The company is no longer feeling that love. Earlier this year, in the face of high penetration and slowing growth, Netflix had a change of heart. The company notified members that the service was only for use by members in their immediate household. It introduced paid sharing plans, which allowed subscribers to add people outside their household to their account for $7.99 more per month.
While there was the usual wailing and gnashing of teeth from users, the plan was wildly successful. Netflix had its greatest springtime subscriber spike in years -- and new data suggests there's more to come.
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A brilliant strategy
Investors were concerned that Netflix's password-sharing crackdown could backfire, weighing on subscriber growth, but it turned out those fears were unfounded.
In the first quarter -- which has been historically slow -- Netflix added nearly 6 million new subscribers, its biggest Q1 gains in three years. Management credited its strong performance to the launch of paid sharing across "80% of our revenue base." The company noted that new subscribers already exceeded the cancellations from customers protesting the move. Netflix's shareholder letter held more good news: "We expect revenue growth to accelerate in the second half of '23 as we start to see the full benefits of paid sharing plus continued steady growth in our ad-supported plan."
Based on recent third-party data, this company's strategy is still paying dividends.
Millions of new subscribers
After strong subscriber additions in June, the trend continued in July, albeit at a slower pace. Netflix added more than 2.6 million new gross additions in the U.S. last month, according to a report released by market-data provider Antenna. That compares to nearly 3.5 million in June.
The report went on to note that roughly 64% of those signed up for Netflix's premium or standard plans, the company's two most expensive tiers. Furthermore, Netflix is no longer offering its basic ad-free plan to new or returning members, which likely moved many new subscribers up to higher-cost plans.
There was additional good news on the ad-supported plan front. Antenna noted that 23% of new subs opted for the standard-with-ads plan. In Q1, Netflix noted that its ad-supported tier in the U.S. generated more revenue per member, on average, than the standard plan, making it more lucrative. As the company builds out its advertising business, its ad-supported tier should become even more profitable.
Antenna uses a variety of data to draw its conclusions, including "online purchase receipts, credit, debit and banking data, and bill-scrape data." So, while the data doesn't count actual customer additions, it serves as a sensible and data-based proxy for subscriber growth.
Finally, the report noted that Netflix added more subscribers in July than any other streaming service.
Reenergizing Netflix's growth
After a pandemic-induced growth spurt, Netflix had fallen on hard times. Customer additions slowed to a crawl, with many investors leaving the stock for dead. The addition of its Basic with Ads plan, which starts at $6.99 per month, has attracted more price-sensitive viewers, while paid sharing also brought many Netflix hangers-on in from the cold.
For the upcoming third quarter, management said, "We anticipate Q3 '23 paid net adds will be similar to Q2 '23 paid net additions." Netflix expects that its growth will "accelerate more substantially" in Q4, fueled by steady growth in advertising revenue and increased subscriber growth due to its paid sharing plan.
While some of the low-hanging fruit has already been picked, the paid sharing plan could continue to pay dividends. Netflix previously estimated that there were as many as 100 million non-paying households worldwide, giving the company a large pool to draw from.
To be clear, Netflix isn't the screaming buy it was a year ago. The stock is currently selling for roughly 5 times next year's sales. That said, management has outlined a clear path to continuing growth, and given its scale and leverage, each new subscriber will add to the company's growing bottom line.
