The company said Wednesday in an upbeat earnings report that it added millions of subscribers and revenue in the second quarter, coming at a time when the entertainment industry is facing a double whammy due in part to fallout from the streaming economy.
Netflix added 5.9 million new subscribers, bringing its total worldwide subscribers to 238 million. Its revenue rose 3% from a year earlier to $8.2 billion, and the company said it had a profit of $1.5 billion for the quarter, similar to a year earlier.
The result was attributed to two policies introduced last year after Netflix reported subscriber churn for the first time in a decade: a crackdown on password sharing and a relatively new ad tier.
The company said it has encountered little resistance to its password-sharing crackdown. It noted that revenue in every region where its service is offered is now higher than before the sharing restrictions were implemented, and that new subscriptions have outstripped cancellations.
The new ad tier that Netflix launched in November is still a small part of the company’s business, but Netflix says it believes it will continue to grow. Since the first quarter, membership at its ad-supported tier has doubled.
“While we’ve made solid progress this year, we have more work to do to re-accelerate growth,” the company wrote in a letter to shareholders. “We remain focused on: creating a steady pace of must-see shows and movies; improving monetization; adding fun to games; and investing in improving the services we offer our members.”
Comcast, Warner Bros. Discovery, Paramount Universal and Disney will all report earnings in the coming weeks. But Netflix’s optics are especially complex. Netflix has been the bulk of the critics surrounding the strike, mainly from writers, who say the streaming-age economy has eroded their working conditions and hurt their overall compensation. The company was already at loggerheads with angry shareholders last month when they voted to reject a generous pay package for company executives.
Netflix said little about the strike, other than to note that it has lowered the total amount of cash it plans to spend on content this year due to “the timing of production starting and the ongoing WGA and SAG-AFTRA strikes,” referring to the writers and actors unions. The company acknowledged that free cash flow expectations for 2023-24 could “cause some volatility” because there’s no guarantee when film and TV production will restart.
Shares of traditional entertainment companies have been falling since the writers’ strike in May, while Netflix shares are up about 50%. But the company’s shares fell about 9% in after-hours trading on Wednesday, likely due to weaker-than-expected revenue and sales forecasts.
On an investor call, Netflix co-CEO Ted Sarandos did not directly answer how long the strike might last before the streaming service runs out of new content.
“We’ve been doing deals; we’ve been in talks with actors, producers, people in the industry,” Mr. Sarandos said. “We’re very hopeful that we can get a deal now,” he continued, adding that he grew up in a union household.
Mr. Sarandos, whose father was an electrician, recalled how hard it was for his family when his father went on strike.
Some of Netflix’s productions were able to be completed before the actors’ strike started last week. Other notable series such as Big Mouth, Cobra Kai and Stranger Things were planned but shut down due to unfinished scripts. In the case of Stranger Things, show creators Matt and Ross Duffer chose to stop filming because they couldn’t continue writing on set.
“The writing didn’t stop after filming started” they write On Twitter in early May.
The company has seen some benefit from the strike. Last month, Netflix reported that it would license WarnerMedia’s HBO original programming, including “Insecure,” “Band of Brothers,” “The Pacific,” “Six Feet Under” and “Ballers.”
Analysts are enthusiastic about the changes Netflix is making to its business as subscriber numbers grow and profits stabilize.
“Netflix’s quarterly results show that the streaming company has a clear path to accelerating revenue and profit growth, and they’re executing well,” said senior analyst Jesse Cohen. Investing.com wrote in a report. He did warn that maintaining growth would be challenging in the face of “the saturation of the streaming industry and the diversity of different options available, and the fact that pricing is not necessarily significantly lower than competitors.”
Some analysts are also concerned that the short-term gains the company may make from the strike could become an issue if the strike drags on. “But in the longer term, the strikes could lead to massive exodus and ad revenue losses for streaming companies,” said Scott Purdy, KPMG’s US national media industry leader.
But others are optimistic about Netflix’s ad business, which is still in its early stages.
“They have everything an advertiser could want,” said Bank of America analyst Jessica Rev Ehrlich. “They have reach, they have scale, they have premium video content. They’re very creative and have come up with some very innovative products, like giving advertisers a top 10 show every week. So it’s almost guaranteed to hit the mark.”
Netflix also announced on Wednesday that it is canceling its $9.99 ad-free “Basic” plan in the US and UK. Consumers who subscribe to the plan can keep it, but new subscribers must choose the ad-supported plan for $6.99 per month, or one of two ad-free options for $15.49 or $19.99 per month.