Pricing overhaul fuels Netflix’s growth momentum

• Netflix maintains its strong momentum with revenue and subs growth in the final quarter of 2023
• The positive performance is partially attributed to new advertising-based streaming services and a crackdown on password sharing
• Now, the platform is even more bullish about its performance in 2024
• With high-resolution content consumption expected to grow, the continued growth of streaming giants such as Netflix is fuelling the ‘fair share’ debate

Netflix has reported accelerated growth for the final quarter of 2023, driven by recently introduced ad-supported plans and password-sharing curbs that have proven to be manna from heaven for the video streaming giant.

During the final three months of 2023, the company’s global revenues leaped by an impressive 12.5% year on year to $8.8bn, some $100m above its forecast from October, due to favourable exchange trading and “stronger than anticipated” membership growth.

The company boasted its “largest Q4 ever” with a 12.8% year-on-year increase in global streaming paid memberships to a total of 260.28 million. The paid net additions in the final quarter totalled 13.1 million, compared with 7.7 million in the last quarter of 2022, the company reported in its earnings statement.

Netflix’s improved performance in the period comes after a ban on password sharing, introduced in May 2023, which led to the launch of paid sharing tariffs in more than 100 countries (which account for more than 80% of its revenue base). The move was aimed at prohibiting users from providing their credentials to people from different households unless they pay extra for the privilege.

Additionally, the company has made gains by rolling out a cheaper, ad-supported tier, called Basic with Adverts, to a dozen markets, a move that began in November 2022.

High expectations

Following an even better-than-expected 2023, Netflix is now bullish about 2024, which it says it is entering “with good momentum”. It expects accelerated growth this year, and has forecast a 13.2% year-on-year sales growth for the first quarter to $9.24bn. 

Furthermore, it expects to report net income of $1.98bn for the period, more than double the $938m net income reported for the fourth quarter of 2023.

Its forecast is founded on expectations for “continued membership growth” and an improvement in average revenue per member (ARM) “as we adjust prices”.

In addition, the company plans to invest in its ad-supported business and, while it expects “strong growth” in this segment in the current year, it admitted that this stream is not yet “a primary driver” of its overall revenue growth. However, its aim is to scale that part of its operations and turn it into “a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond”.

To support this, Netflix plans to pull the plug on its Basic plan (the cheapest ad-free tier) in some of its markets where it has already introduced the ad-supported plan, starting with Canada and the UK in the second quarter of 2024. Its decision is based on the realisation that its ads plan now accounts for 40% of all Netflix signups in the 12 markets where the Basic with Adverts service is available.

“In Q4 2023, like the quarter before, our ads membership increased by nearly 70% quarter over quarter, supported by improvements in our offering (eg. downloads) and the phasing out of our Basic plan for new and rejoining members in our ads markets,” the company explained.

Finally, the company noted there’s still a lot of room for growth in its overall total addressable market comprising pay-TV, film, games and branded advertising, which it believes is worth more than $600bn in annual revenues. Despite being the largest single player in this field, Netflix currently accounts for only about 5% of that addressable market, while its share of TV viewing is less than 10% in each country.

“We believe there is plenty of room for growth ahead as streaming expands, and our north star remains the same: To thrill members with our entertainment,” the company argued.

The network effect

Following this train of thought, the increasing consumption of streaming services is a global trend that is showing no signs of abating, and while that’s great news for Netflix and its streaming rivals such as Amazon Prime, AppleTV, Disney+ and more, it is merely stoking the fires raging under the so-called ‘fair share’ debate in Europe, where numerous major telcos are passionately lobbying for the ‘large traffic generators’, such as the streaming companies, social media giants and cloud services behemoths, to contribute towards their capital expenditure (capex) budgets – see Euro telcos pile on fair share pressure.

PP Foresight founder and analyst Paolo Pescatore, who has delved into the trends and implications of Netflix’s results in his latest Paolo’s TMT Picks blog (subscription required), acknowledged that video services are already driving an exponential growth in data traffic and this “will proliferate with better picture formats like 4K, 8K and HDR”. All the while telcos do not generate any additional revenue beyond the connection for providing access – whether that is fibre, 4G or 5G.

“The simple argument is that telcos want to be duly compensated for providing this access and growth in traffic,” he told TelecomTV in an emailed response to questions about the fair share debate. “Some providers like Netflix do pay interconnect fees to telcos, which is something that can be expanded further. As we’ve seen during the pandemic, as more people are accessing a wide range of services simultaneously, this can negatively impact the connection. This leads to a poor user experience and something that should be addressed by all parties,” he added.

However, he pointed out, there is no single bullet that will settle the wrangle and questions remain around whether all traffic should be treated equally – for example, some traffic, such as for mission-critical data like transportation, remote surgery and energy management, might need to be prioritised.

And there are further questions around who “will have to pay for the privilege – is it just limited to the big tech [companies], on what basis and how would this be distributed among all of the telcos?” and whether any payment will distort the market “even further”, Pescatore noted.

In part, he added, “you can sympathise with all parties”, but ultimately, regulators will have to “tread carefully”, ensuring all stakeholders’ concerns are taken into account.

- Yanitsa Boyadzhieva, Deputy Editor, TelecomTV