TBI Tech & Analysis: Behind the numbers of Netflix’s Q2 2023 results

The Night Agent

After Netflix massively exceeded analyst expecations to gain almost six million new subs, Omdia’s Matthew Evenson digs into the numbers to explain why it’s not all good news – and what this means for the streamer going forward.

Netflix added 5.9 million subscriptions in the second quarter of 2023, beating industry estimates. This growth was largely driven by The Night Agent streamer’s recent efforts to clamp down on account sharing between its users. However, this better than expected growth in subscriptions wasn’t matched with equivalent growth in revenue, meaning that Netflix’s ARPU declined.

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Subscription growth across all regions

In its results for the second quarter of 2023, Netflix announced that its global subscription count had risen by 5.892 million in the quarter, a stark change from the equivalent quarter 12 months prior when the service lost nearly one million subscriptions.

Subscription counts grew in all four of Netflix’s reporting regions, with the most net additions coming from EMEA, which has now seemingly cemented its position as Netflix’s largest region ahead of North America.

Almost 1.2 million subscriptions were added in North America, the largest quarterly increase since Q4 2021, suggesting that there is still room to grow the subscription count in its long-standing early markets.

Boost from account sharing changes

One of, if not the main driving force behind this growth has been the implementation of Netflix’s plans to reduce account sharing between Netflix users. After initial testing across 2022 and into the early part of this year, the company rolled out the new options to many of its core markets. These options allow Netflix account holders to add extra members that live outside of the account holder’s household to their subscription for a small addition to their monthly subscription price. Results from Omdia’s consumer research across 12 markets indicates that one third of Netflix users have shared a password to an online video service – Netflix or another service – with a family member or friend.

It’s important to note that these extra member households are not included in Netflix’s main subscription count, but the additional revenue generated is included in the reported revenue total.

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Future focus

While it was a strong quarter in terms of Netflix’s subscription count, the picture was less rosy with regards to revenue and ARPU. Netflix had forecast total revenue of $8.242bn for Q2 2023 but fell short by $55m for a total of $8.187bn. This is certainly not a proportionally significant miss, but the shortfall in revenue alongside the strong growth in subscriptions means that Netflix’s average revenue per user (ARPU) has taken a hit.

In all four regions, the growth in subscriptions was accompanied by a decline in ARPU. There are a few explanations for this ARPU decline: firstly, it suggests that many of the net subscription additions are in Netflix’s lower priced markets which will have dragged the average down. Secondly, many of the net additions may have opted for either the lowest cost basic plan or, where available, the recently introduced Standard with Ads tier, the latter of which is still early in its lifecycle.

In the company’s earnings call for these results, Netflix’s CFO Spencer Neumann commented that with regards to its advertising business, the company has “a lot of work to do to get from here to where it can be… which is a material additional incremental revenue and margin driver for the business.” Netflix’s challenge going forward will be to ensure it monetize these and any further additional subscriptions to the level of its long-existing members. That the company has decided to remove the entry level basic plan in three of its core markets (Canada, the UK, and the US), suggests a confidence in its ability to build a strong advertising business while still allowing it to offer a low-cost entry-level tier in a competitive market at a very price conscious time for consumers around the world.

This piece was adapted from the report ‘Netflix adds 5.9 million subscriptions but falls short of revenue forecasts’, written by Omdia research analyst, media and entertainment, Matthew Evenson, which is available to read in full here (with a subscription).

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