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Offering the same service at higher prices suggests a paucity of ideas. Netflix is eliminating free password sharing in a bid to force freeloading viewers to pay up. The result was a 5.9mn bump in subscriber numbers in this year’s second quarter that was hailed as a show of strength by some analysts. But this is only a temporary fix.
Like ride-sharing company Uber, Netflix priced its streaming service at low rates to attract the biggest audience possible. Like Uber, it was then bombarded by rivals willing to spend large sums to compete. Six years ago, Netflix claimed that its only real competition was sleep. Now it includes comparisons to streaming competitors in its shareholder letter.
As its shareholders grow weary of subsidising online services, prices are rising. NBCUniversal’s Peacock just lifted its cheapest monthly rate by $1 and Disney+’s US revenue per subscriber has picked up by 20 per cent in the past year.
This means Netflix’s increases do not stand out. It is still the sector leader with nearly 239mn subscribers and expects another increase this quarter. But Netflix must spend more on marketing to draw in those subscribers.
Lower costs are temporary too. In a repeat of the shutdowns that occurred during Covid-19 lockdowns, the Hollywood writers’ strike has stopped production of films and TV shows. That means Netflix will spend less on content. Free cash flow is expected to be at least $5bn this year, up from $1.6bn in 2022. Long-term debt has come down as well to $14.1bn from $14.9bn two years ago. One can sense that the focus is on level-headed financial decisions just by the near total lack of chatter about video games — an expensive endeavour that Netflix is also involved in.
But when all of the users who were sharing passwords pay up or leave, Netflix will have to find new sources of revenue growth. Advertising subscriptions are not yet large enough for Netflix to choose to put a number on them. It is also a crowded field. Everyone, from YouTube to Uber, now tries to attract ad dollars.
If Netflix wants to keep its focus on tweaking payments it could remove monthly subscriptions altogether and reduce churn by offering only annual or 18-month plans. Month-by-month payments were once a way to distinguish streaming from cable TV. That differentiation is no longer necessary.
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