Netflix loses nearly 1 million subscribers in Q2, will launch ads in early 2023

The news: Netflix’s second-quarter earnings show a company still trying to get on solid ground after its Q1 report shocked the streaming industry and sent the company on a desperate reimagining of its business model.

• Netflix lost 970,000 subscribers in Q2, a loss nearly five times as large as Q1 but still far below its expected loss of 2 million.
• The streaming service’s ad-supported (AVOD) subscription tier will launch in the “early part of 2023.” That’s later than the Q4 launch suggested by internal notes but still an aggressive timeline for a company that’s historically shirked advertising.
• Netflix will test two approaches in Latin America to reduce password sharing with the hopes of launching an “easy-to-use paid sharing offering” in 2023.

Still shedding subscribers: Netflix’s Q2 subscriber loss may not have been as bad as expected, but it's still a worrying sign for a company that relies entirely on subscription revenues.

• Price hikes, a crowded streaming market, and an uncertain economic outlook have prompted many to cancel their Netflix subscriptions, prompting the company to turn to ad-supported streaming to address revenue concerns.
• Netflix has been fishing for an intellectual property that it can expand into a Star Wars-like multimedia franchise for some time with little success while competitors’ originals make a bigger splash.
• Its strategy of shotgun blasting originals at the wall to see what sticks has not proved fruitful, though it did benefit from releasing the latest season of hit show “Stranger Things” across two monthly subscription periods.
• There are still some sectors of growth for Netflix. APAC subscriptions rose by 1 million, and the company expects to add 1 million subscribers in Q3. But those come with caveats: Its APAC growth has been stymied by competitors, and last year’s Q3 saw it gain 4.4 million subscribers.

AVOD update: Netflix is focusing on an ad platform to help make up for its stalling growth and revenue losses, but there’s no guarantee that a cheaper, ad-supported option will resolve churn issues.

• Tightening purse strings and more streaming options than ever have prompted consumers to broadly adopt AVOD viewing channels. US AVOD viewership will reach 140.1 million this year.
• Netflix initially said it could take years to launch ads on the platform, but that changed after its rushed announcement was criticized and competitors ramped up their own AVOD plans; Netflix’s announcement that it would partner with Microsoft on an ad platform came just one day after Disney struck a similar deal with The Trade Desk.

Analyst insight: "Netflix's subscriber loss was expected, but it remains a sore point for a company that is wholly dependent on subscription revenue from consumers,” said senior analyst Ross Benes. “Given demand from brands, its advertising product will likely boost average revenue per user eventually. But there's no evidence yet it will lessen opt-outs or meaningfully bring in more subscribers."

The big takeaway: Netflix’s extremely high market penetration means its subscriber growth was bound to stall eventually.

• Marketers will pounce on the opportunity to advertise alongside Netflix’s expansive catalog and reach its hundreds of millions of viewers, but an ad-supported tier may not be enough for Netflix to stanch its losses.