Netflix’s vision for the future of streaming: More expensive or less convenient

CNN

By Frank Pallotta, CNN Business

Netflix lost roughly a million customers last quarter — the most in the company’s 25-year history. But it stopped the bleeding in a nightmarish year, and the company believes that its new long-term initiatives will boost sales and subscribers.

Those efforts — which include cracking down on password sharing and introducing a lower-priced tier with ads — were cheered by Wall Street. However, they’re diametrically opposed to what helped make Netflix the king of streaming in the first place: its beloved consumer experience.

The streamer has never been able to compete with rivals like Disney in terms of sheer content, but it built its company around giving customers the best overall experience possible.

Now, Netflix is trading away some of that experience so it can grow in the media business.

“They’re going to make it harder for people to share with their family, make it hard for people to watch in multiple locations… If you choose it, have advertising interrupt your content,” Michael Nathanson, a media analyst at MoffettNathanson, told CNN Business. “So the original consumer proposition, which was incredibly great value, is now flipping on its head.”

These initiatives are undoubtedly good for Netflix’s bottom line, but aren’t necessarily what customers are clamoring for. That could become an issue as the company attempts to simultaneously attract new users, reduce churn, and make money.

Ultimately, in order for Netflix to succeed in the streaming world, it may have to become less like Netflix.

“We … are advertising free”

“We … are advertising free. That remains a deep part of our brand proposition.”

So said Netflix in a 2019 letter to shareholders.

The company added that it believed it had “a more valuable business in the long term by staying out of competing for ad revenue” and would focus on “competing for viewer satisfaction.”

Boy, how things have changed.

Netflix announced last week that it would partner with Microsoft on building its new ad tier and said Tuesday that it expects to launch the offering “around the early part of 2023.”

In three years, advertising at Netflix went from being “never, ever” to one of the foundations of the company’s future growth. That’s bound to be perplexing for subscribers, who don’t have to watch ads since its existing plans will stay ad-free, but will now have to choose between a cheaper ad-supported plan and a premium one.

“The concern I have over an ad-funded model is whether ad revenue can cover the loss in premium subscriber revenue, as a portion of the current subs will likely downgrade to the cheaper ad option,” Zak Shaikh, vice president of programming at research-based media firm Magid, told CNN Business.

And what effect could ads have on one of Neflix’s most vital pillars: content.

“Will ads have an impact on content standards and the supposedly ‘artist-friendly’ environment of Netflix?” Shaikh said. “Will advertisers expect Netflix to censor certain content that right now Netflix has not had to be concerned about?”

What’s the password?

Password sharing is another area Netflix is trying to tighten up, but it could prove to be a difficult gambit.

The company said Tuesday it’s in the “early stages of working to monetize the [more than] 100 million households that are currently enjoying, but not directly paying for, Netflix.” Translation: you may have to pay more to share your account.

Netflix has been experimenting with possible solutions by rolling out two test features in Chile, Costa Rica and Peru called “Extra Member” and “Profile Transfer.”

Getting users to pony up to keep their kids, friends or colleagues on their accounts will not be easy. “We know this will be a change for our members,” the company admitted.

Until recently, Netflix had no issue with subscribers sharing their passwords. In fact, the service said in its April letter to investors that the policy likely helped fuel its growth by “getting more people using and enjoying Netflix.” But now the company needs those people to pay up.

Will that alienate millions of consumers?

“What I worry about is that the goodwill that they’ve built over the years … dissipates over time when they do things that should be more consumer unfriendly,” Nathanson, the media analyst, said. “All the incredible value and goodwill that they built is at risk of being jeopardized.”

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