Netflix U-turn on ads make sense

Neflix’s shares crashed on Wednesday, with Bill Ackman’s hedge fund selling out (see page 14) as the streaming giant reported its first drop in paid subscriber numbers in over a decade, says Dan Gallagher in The Wall Street Journal. The share price has now fallen by about two-thirds from its midNovember peak, with investors fearing Netflix is “behind the curve”, evidenced by a change of approach to both passwordsharing and advertising.

The fact that one person for every two paying subscribers is a free rider is undoubtedly a major challenge for Netflix and its peers, who hope for “a world where every household subscribes to several services”, says Lex in the Financial Times. But the soaring cost of living will only force audiences to cut back harder – even the number of BBC licence fee payers is falling.

However, Netflix may be on firmer ground when it comes to advertising, says Jennifer Saba on Breakingviews. Sure, “an advertisement-supported tier might cannibalise higher-paying customers”. But offering free or heavily discounted access in return for putting up with advertising breaks could “convert password-sharing households into direct customers”, offsetting the risk.

The experience of musicstreaming service Spotify – which has 180 million paying listeners alongside a free advertisement-supported tier – shows that it is possible to juggle the two. If Netflix can copy Spotify’s success, it could boost 2022 revenues by $5bn, which could in turn – assuming similar advertising profit margins to Facebook – boost top-line earnings by a third. “A commercial break could be just what Netflix needs.”