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Netflix Pulls Levers and Hits the Jackpot, But Long-Term Remains Unclear
Netflix reported its September quarter, highlighted by subscriber adds that exceeded expectations by 60% and sent shares of NFLX up about 17%. Over the past year the company has pulled three levers to restart growth: raising prices, introducing an ad model, and cracking down on password sharing. While these new initiatives are working, the company will soon face tough comps and the creator economy.

Key Takeaways

Password crackdown is working better than anyone expected, including Netflix.
Netflix is raising their pricing again, because the strategy works.
It's too early to tell how effectively the advertising model is working.
Netflix is investing in new growth levers, but will they offset the rise of the creator economy?

Account sharing crackdown

The biggest takeaway from Netflix’s September earnings was that they significantly exceeded paying net subscriber adds (8.8M vs consensus 5.5M, up 263% Y/Y). The reason is the password crackdown is working. This was the second consecutive quarter with the company significantly beating paid add estimates. In June they reported 5.9M vs. Street at 2.1M, which was up from a loss of 970k subscribers in June of 2022.

Net adds have been all over the board. In the first three quarters of 2021 the company added about 10M paying subs. In the first three quarters of 2022 the company added 1.2M paying subs. In the first three quarters of 2023 the company added 16.4M paying subs. 

Management noted the success of the crackdown, saying, “We’re just incredibly pleased with how it’s been going. And you can see the progress from our membership growth in Q2. Now in Q3, you can see it embedded in the revenue outlook for Q4.”

Big picture: The password lockdown strategy has been a Grand Slam, as evidenced by paying subs increasing from 1.2M last year to 16.4M this year. That’s great for Netflix’s business because those customers will stick around and continue to pay them. There is a downside to the company’s recent success: difficult comparisons. All this success year to date raises the bar for growth comparisons in 2024. Specifically, we should see a sharp decline in Y/Y net sub adds starting in June of 2024.  Anticipation of this difficult comp will likely have a negative impact on NFLX’s multiple starting in 2024.


Impact of pricing

Netflix announced it’s raising its price across its four subscription levels by an average of 9%. It’s been 18 months since Netflix raised pricing, compared to a 15-month window between the previous price increase. As a reference point, the last price increase was an average of 7%. In other words, Netflix waited longer to raise pricing but raised pricing by more compared to last time.

The latest price increase is for the US, UK, and France, which makes up roughly 50% of revenue. If they retained 100% of subscribers, this would add $1.4B to revenue over the next 12 months, or an additional 4-5% to annual revenue. The reality is the company will likely retain between 96-98% of subs, which, by picking the midpoint, implies a price increase will add roughly 3% to annual revenue. The breakeven point for a 9% price increase is Netflix retaining 92% of subs, which they should easily be able to do.

Currently, the average plan is priced at $14. Eventually they’ll hit a point where retention is more dramatically impacted by price increases. My sense is $20/month is the maximum they can go over the next five years. That means the company still has the opportunity to increase prices by 43% before consumers push back more aggressively.



In November 2022 Netflix launched a new ad-based tier. The offering is priced at $7/month in 12 markets, including the U.S., as an alternative to ad-free plans. Currently, the product has about five minutes of ads per hour (8% ad load), compared to linear TV at about 20 minutes per hour (33% ad load). In other words, there is room for Netflix to increase ad load.

In the September quarter ad plan membership grew 70% sequentially Q/Q on top of growing 100% from the previous Q/Q reporting. While these growth rates are impressive, they are coming off of low numbers so consider them inflated. Management stated 30% of new sign-ups are choosing the ads plan where it is available. Netflix’s goal is to make the ads offering more competitive, offering 95% of the content on the non-ads plan, while offering improved features like the number of streams, video resolution, and download functionality.

It’s likely Netflix will remove its standard plan in some countries that will have the effect of increasing the number of ad plan subscribers. In a couple of years I suspect the company will increase the ad load to closer to 15-20%, which will increase average revenue per user.

The bottom line on the ad model is that it appears to be tapping into a new customer dynamic with the opportunity to improve economics over time as more ads are introduced into the format. This will be a slow-rising revenue tide.


Future revenue levers

Netflix understands they cannot rely on price increases, password crackdown, and an ad-supported model to grow the business long term. They’ve outlined the following initiatives to support long-term growth, including:

  • Mix of content leasing vs IP (e.g., streaming USA’s Suits vs Netflix’s Stranger Things)
  • Netflix House, a physical Netflix retail location combining a restaurant, merchandise, and branded events into one experience (announced earlier this month)
  • The Netflix Cup, the company’s debut live sporting event, a golf tournament involving PGA Tour pros and F1 Racing drivers
  • Increased investment in video games, specifically around Netflix IP branded content (e.g., Stranger Things)

In a vacuum, these growth initiatives should be successful. Unfortunately, the company is operating in an environment where content attention is shifting to the creator economy. This is evidenced in a Deepwater estimate that, today, YouTube hours viewed are 4x that of Netflix. The creator economy is estimated (Goldman) to be growing annually at 18% over the next five years, going from $250B today to $480B in 2027.

One challenge with Netflix embracing creator content is Netflix is the establishment, and, by definition, any efforts to support long-tail content would make it mainstream and therefore less appealing to consumers of the creator economy.


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