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Netflix Shares Plummet as Investors Seek Clarity on Revenue Growth

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Netflix's Revenue Per Membership Weakened in Recent Quarter

Focus on Revenue Drivers

Netflix experienced a decline in its average revenue per membership in the most recent quarter. Instead of increasing prices, the company focused on its stated revenue-drivers. As part of this strategy, Netflix removed its least expensive, no-ads plan in order to encourage customers to opt for the cheaper ad plan. CFO Spencer Neumann explained that price increases were put on hold as the new sharing policy rolled out. Neumann also stated that the revenue contribution from advertising is expected to be gradual and not significant in the current year.

Ad-Supported Plan Performance

The ad-supported plan, launched in late 2022, has gained approximately 1.5 million subscribers, accounting for a small portion of Netflix's total subscriber base. However, the company did not provide specific details about the performance of the ad-supported tier. A report from The Information highlighted the limited impact of the ad-supported plan. With the revenue-driving initiatives in the early stages, it is challenging to project Netflix's revenue for the next two years, leading to uncertainty among Wall Street analysts.

Analyst Expectations and Patience

Wells Fargo analyst Steven Cahall noted high expectations from investors before Netflix's earnings report. However, in a post-earnings note, Cahall mentioned that revenue growth might take longer than anticipated. Netflix co-CEO Greg Peters emphasized the gradual nature of the revenue acceleration during the investor call. While Netflix forecasts a 7% year-over-year revenue increase in the third quarter, the company's future performance remains uncertain.

Strength Amid Media Chaos

Compared to its legacy media competitors, Netflix has performed well and demonstrated strength in subscriber growth. This resilience is particularly significant as other media companies face challenges and anticipate a turbulent year due to streaming losses and the Hollywood actors and writers strikes. Despite last year's subscriber loss, Netflix added 5.9 million customers and shifted its focus to revenue growth and forecasts.

Conclusion: Netflix's Revenue Challenges and Implications for New Businesses

Netflix's recent decline in average revenue per membership presents interesting insights for new businesses entering the streaming industry. The company's focus on revenue drivers, rather than price hikes, highlights the importance of finding innovative ways to increase revenue while maintaining a competitive pricing structure. By removing its least expensive, no-ads plan and promoting the cheaper ad-supported plan, Netflix aims to encourage customers to opt for a more cost-effective option, albeit with limited impact thus far.

For new businesses in the streaming space, this suggests the need to carefully consider pricing strategies and revenue drivers from the outset. Rather than solely relying on increasing prices, exploring alternative revenue streams, such as ad-supported plans or additional service tiers, can provide more flexibility for growth and customer acquisition. Finding the right balance is crucial, as Netflix's cautious approach to revenue acceleration demonstrates the importance of gradual implementation and managing investor expectations.

Furthermore, Netflix's ability to withstand media chaos and maintain subscriber growth in the face of challenges sets an example for new businesses. As other media companies face streaming losses and potential strikes, building resilience and focusing on long-term revenue growth should be a priority. By learning from Netflix's experiences and adapting strategies to navigate the evolving landscape, new streaming businesses can position themselves for success in a highly competitive industry.

In conclusion, Netflix's revenue per membership decline provides valuable insights for new businesses entering the streaming industry. By prioritizing revenue drivers, exploring alternative pricing strategies, and maintaining resilience amidst industry challenges, new businesses can successfully navigate the evolving streaming landscape and position themselves for long-term growth and profitability.

Article First Published at: https://www.cnbc.com/2023/07/20/netflix-stock-revenue-growth-clarity.html

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