Netflix plans to offer lower-cost, ad-supported tiers to consumers over the next two years, the world’s largest on-demand video streaming service said Tuesday, as it appears to be increasing its subscriber base amid stiffer competition from rival companies.
The company, which reported a loss of 200,000 subscribers in the first quarter, will introduce its ad-supported plans to give customers more choice, company co-chief executive Reed Hastings said during the earnings call.
The upcoming ad-supported plans will mark a major shift in the way Netflix has looked at ads earlier in its 25-year history, during which it has racked up nearly 222 million paying customers.
Netflix has been repeatedly asked over the years if it would ever consider bringing ads to its platform, an idea it has always shot down. At a conference in 2017, Hastings suggested that the company was not well suited to compete with companies like Facebook and Google in advertising.
Hastings acknowledged the sea change today, saying the ad model has matured enough and proved successful for rivals such as Hulu and Disney. “We have no doubt that it works,” he said.
Disney has long offered an ad-supported tier on several of its services, including its Asia-focused streamer Hotstar. The company said last month that it plans to launch an ad-supported Disney+ plan in the US later this year.
“Those who have followed Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscriptions,” Hastings said. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice,” he said.
“It makes a lot of sense that consumers who want a lower price and are tolerant of ads get what they want,” he said, adding that the company doesn’t view the ad-supported model as a “short-term solution.”
Customers who don’t want to see ads will still be offered ad-free plans, he said.
“In terms of earning potential, the online advertising market has definitely progressed and now you don’t have to include all the information about people that you used to. So we can be a great publisher and get other people to match all the fancy ads and integrate all the data about people… so we can stay out of that,” he said.
The move to advertising, which many analysts have long argued Netflix should have explored earlier, follows Netflix’s aggressive experimentation with pricing in many markets, including India, Indonesia and Kenya in recent years to increase the reach of its service.
In December, Netflix introduced its most affordable monthly pricing yet in India, where individuals can subscribe to Netflix for just 199 ($2.6). The company offered a free mobile plan in Kenya last year. The company said it is seeing “nice growth” in several markets, including India.
Netflix reported its first subscriber loss in more than a decade on Tuesday and expects to lose 2 million additional subscribers in the current quarter. Shares of the company fell a whopping 27% to $256 apiece in expanded trading.
The company’s revenue grew 10% to $7.8 billion, which also fell short of Wall Street’s expectations of $7.9 billion. The company acknowledged that sales growth “had slowed significantly”.
“Our relatively high household penetration — if we factor in the large number of households sharing accounts — coupled with competition is driving revenue growth headwinds,” it said in a statement earlier Tuesday.
The company blamed a number of factors for the decline in its subscriber base. It said the slowdown is a sign of saturation in key markets. It also acknowledged growing competition from rivals such as Disney, Paramount, and Warner Bros. The company also noted that more than 100 million users watch Netflix by borrowing login credentials from others.
During its earnings call, the company said this large group of users who are not currently paying for the service are an attractive audience to convince to convert to subscribers or make their friends and family pay more.