Netflix Co-CEO Hastings Predicts ‘End of Linear TV’ in 5-10 Years

If there was a “single thing” in Q2 that spared Netflix half the 2 million net subscriber losses it projected in April (see 2207190077), it was May's debut of the fourth season of the science fiction horror series Stranger Things, said co-CEO Reed Hastings on a quarterly earnings webcast Tuesday. “We're talking about losing 1 million instead of losing 2 million, so our excitement is tempered by the less-bad results,” he said.

Netflix lost 1.3 million paid subscribers during the quarter in the U.S. and Canada and 770,000 in Europe, the Middle East and Africa, said the company's shareholder letter Tuesday. It gained 1.08 million paid net additions in Asia Pacific and about 10,000 in Latin America, said the letter.

Streaming “is working everywhere,” and “everyone is pouring in,” said Hastings. “It's definitely the end of linear TV over the next five, 10 years,” he said. It was somewhat “tough” losing a million subscribers during the quarter and “calling it a success,” but “we're set up very well for the next year,” he said. The stock closed 7.4% higher Wednesday at $216.44

Netflix plans to take an “iterative approach” to ad-supported streaming when it debuts its AVOD tier in early 2023, said Chief Operating and Product Officer Greg Peters. “This is what we call the crawl, walk, run model,” he said. “We think there's a tremendous opportunity to leverage that innovation DNA that we have” to offer AVOD subscribers and advertisers “an incredible experience,” he said. “When you look at the scale of our offering, the technical DNA, the partners that we've got lined up, I'm pretty optimistic that over a couple of years, we can deliver an experience which is fundamentally different from the ad experience on linear in a way that supports all of the stakeholders.”

All the ads “served” on the Netflix AVOD offering “will come through Microsoft,” its ad technology and sales partner, said Peters. “That's an exclusive arrangement with them.” A “bunch of fundamentals” drew Netflix to Microsoft, he said. A “key component of what we liked about this partnership” was the “flexibility” in Microsoft’s “innovation orientation,” he said. “We've got lots of flexibility to work together” to evolve the ad tier’s “technical capacity” and go-to-market approach “over time,” he said.

The AVOD tier will be designed to address the “price sensitivity around consumers,” said Peters. Some consumers have never signed up for Netflix, he said. Others “decided to cancel for a variety of reasons,” he said. “Some of those are folks that are currently watching Netflix, but they're using another paying member’s account credentials.” All of those “represent opportunities for us, because we're bringing a wider range of prices through the ad-supported offering, a lower consumer-facing price to be able to attract a broader set of members,” he said.

As Netflix weighs “the right pricing model” for its AVOD tier, “we also want to keep it as simple as we can from a consumer-facing perspective,” said Peters. “In terms of the on-ramp, the planned selection, how upsells happen, we want to work those flows iteratively over time, so we build into that complexity without making it overwhelming for consumers.”

The strategy will be to launch first in countries with “more mature ad markets,” and where “we feel more confident in the ad monetization,” said Peters. “Then we'll sort of explore next tiers of countries over time,” he said. The “initial response” Netflix is getting from brands and advertisers is “quite strong,” he said. Netflix feels “quite confident that as we sort of grow into this” over the long term, the “unit economics” of the AVOD offering will be “quite good,” he said. “This is going to start small relative to our total revenue mix, but we think we can grow it to be substantial over a period of time.”

Netflix has been working "behind the scenes" for almost two years building the “technical capabilities” for an account-sharing monetization plan rollout, said Peters. “Now we actually get to put something in front of consumers and see how they react.”

Of the two models Netflix is testing in five Latin American countries, both are “similar” in asking consumers “to pay a little bit more for different forms of sharing,” said Peters. “At this point, we'll sort of see what works for consumers. That's obviously the reason we're trying these different approaches, is to learn more.” The aim will be “to lean into a consumer-friendly model that supports legitimate-use cases,” he said.