Netflix execs discuss early ad-level results, ‘crystal onion’ and expected ‘cancel backlash’ from paid password sharing launch

Netflix’s new co-CEO duo Ted Sarandos and Greg Peters, along with Reed Hastings, who will take over as CEO, discussed the leadership change and more in their Q4 2022 earnings interview.

Overall, executives said there is no significant change in strategy with the executive changes. “We’ve always been focused on the future and where consumers are going,” Sarandos said, noting that Netflix doesn’t have to run a legacy media business. In the US, Netflix spends about 8% of the time watching TV, “so that’s a huge amount of growth ahead of us, even in markets where we’re very well established.”

For the fourth quarter, Netflix reported a net gain of 7.7 million new subscribers, topping the 4.5 million it previously forecast. The company did not highlight the performance of Netflix Basic With Ads, which launched in the US on November 3 at $6.99 per month, 30% less than the regular basic plan with no ads ($9.99 per month). month). The ad-supported package, which provides a single stream per account, is available in 12 countries: Australia, Brazil, Canada, France, Germany, Italy, Japan, Mexico, South Korea, Spain, UK, and US.

Speaking about the level of hype, Peters said: “It’s ridiculously early, but we’ve already learned a lot, I’d say… All the technology works, the product experience is good and that’s really a testament to the teams at Netflix and Microsoft, they worked very hard to make that happen.” He added that subscriber engagement for users on the ad-supported plan is similar to what Netflix sees among subscribers on the ad-free plans. Plus, Netflix isn’t seeing that many customers move from ad-free tiers to the cheapest ad plan, Peters said.

Disney’s Hulu “had a 10-year lead” over Netflix in ad space, Hastings said in the interview. Chief Financial Officer Spencer Neumann said that roughly half of Hulu’s members are estimated to be in the ad tier which, directionally, Netflix sees a similar growth trajectory. “We’re not going to be bigger than Hulu in the first year, but hopefully in the next few years we can be at least as big,” Neumann said.

Later in the first quarter, Netflix expects to more widely roll out its shared payment program through which it seeks to turn unauthorized password-sharing accounts into paying customers. The company did not disclose any other new details, but said it expects that will likely result in net additions paid being higher in the second quarter than in the current quarter. Based on Netflix’s testing in Latin America, the company expects some “cancellation backlash,” according to Peters, which will hurt member growth in the near term.

“This is not going to be a universally popular movement,” Peters said. There will be “a bit of a cancellation reaction to that,” similar to what Netflix sees when it raises prices. He described the initiative as giving account sharers “a little push” to pay for users outside their own household (something Netflix’s terms of service say is not allowed).

Sarandos was asked by BofA Securities analyst Jessica Reif Ehrlich, who conducted the fourth quarter earnings interview, if Netflix was interested in acquiring WWE, after founder Vince McMahon has returned to the company and is actively looking to sell the team. wrestling entertainment. She responded to the question about WWE by saying “we have a lot of M&A activity going on all the time, we look at it all, but nothing we can comment on.”

Sarandos reiterated his talking points on the subject. “In sports, our position has been the same, which is to say, we are not anti-sports, we are pro-profit, and we haven’t been able to figure out how to make a profit on major league sports rentals in our subscription model. . I don’t want to say that it won’t change, we would be open to it, but that’s the way it is today.”

He was asked if Netflix was interested in offering a free ad-supported TV (FAST) service. “Look, we’re open to all these different models that are available right now, but we’ve got a lot on our plate this year,” he said, adding that “we’re looking at that segment.”

Netflix executives were also asked about the release of Rian Johnson’s “Glass Onion: A Knives Out Mystery.” According to the streamer, it was the fourth most-watched movie on the service in the first four weeks of its release.

“We are delighted with all aspects of the ‘Glass Onion’ launch,” said Sarandos. With the limited theatrical release, he said, “We create a lot of demand that we fulfill with our subscription service.”

Sarandos rejected Reif Ehrlich’s suggestion that the company left money on the table by pulling “Glass Onion” out of theaters after a week. He stressed that the company’s core focus is getting members to content on the streaming platform: “Everything else is really a ploy to build excitement around those movies.”

Meanwhile, Netflix is ​​experimenting with fitness content, announcing a deal with Nike in December for a series of exercises, after avoiding it for years because much of it is widely available online for free, Sarandos said. He called the company’s short-form fitness content partnership with Nike “a very good test” with a top-tier partner. “Do people want to use Netflix to get fit? If they do, we would like to continue serving that,” he said.

At the end of the interview, Hastings noted that he has been on the 83rd earnings call for Netflix, with Thursday’s interview being his last.

“Overall, I would say our first 25 years were good. And I am very excited that the next 25 years for Netflix will be great under our expanded leadership team,” he said. Earlier on the call, Sarandos commented, “In over 22 years, Reed has positively changed my life in every way imaginable.”

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