Netflix Execs Talk Early Ad-Tier Results, ‘Glass Onion’ and Expected ‘Cancel Reaction’ From Paid Password-Sharing Rollout

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Netflix’s new co-CEO duo, Ted Sarandos and Greg Peters, along with Reed Hastings, who’s stepping into an executive chairman role, discussed the leadership change and more on its fourth-quarter 2022 earnings interview.

Overall, the execs said there’s no significant change in strategy with the executive changes. “We’ve always been focused on the future and where the consumers are going,” Sarandos said, pointing out that Netflix doesn’t have to manage a legacy media business. In the U.S. Netflix is about 8% of time spent viewing TV “so it’s an enormous amount of growth ahead, even in markets where we are very well established.”

For Q4, Netflix reported a net gain of 7.7 million new subscribers, blowing past the 4.5 million it previously forecast. The company didn’t break out the performance of Netflix Basic With Ads, which launched in the U.S. on Nov. 3 at $6.99 per month, 30% less than the the regular Basic plan without ads ($9.99 per month). The ad-supported package, which provides a single stream per account, is available in 12 countries: Australia, Brazil, Canada, France, Germany, Italy, Japan, Mexico, South Korea, Spain, the U.K. and the U.S.

Speaking about the advertising tier, Peters said, “It’s ridiculously early but we’ve learned a bunch already, I would say… The tech is all working, the product experience is good and that’s really testament to both Netflix and Microsoft teams, who worked very hard to make that happen.” He added that subscriber engagement for users on the ad-supported plan is similar to what Netflix sees among subscribers on the ad-free plans. In addition, Netflix isn’t seeing many customers switching from ad-free tiers to the cheaper ad plan, Peters said.

Disney’s Hulu “had a 10-year head start” over Netflix in the advertising space, Hastings said in the interview. CFO Spencer Neumann said that about half of Hulu’s membership is estimated to be on the ad tier that directionally, Netflix sees a similar growth trajectory. “We’re not going to be larger than Hulu in Year One, but hopefully over the next several years, we can be at least as large,” Neumann said.

Later in Q1, Netflix expects to more broadly roll out its paid sharing program through which it’s looking to convert unauthorized password-sharing accounts to paying customers. The company didn’t reveal other new details but said it expects that will likely result in paid net adds to be greater in Q2 than in the current quarter. Based on Netflix’s test runs in Latin America, the company expects some “cancel reaction,” according to Peters, which will hurt near-term member growth.

“This will not be a universally popular move,” Peters said. There will be “a bit of cancel reaction to that,” similar to what Netflix sees when it raises pricing. He described the initiative as giving people who share their accounts “a gentle nudge” to pay for users outside their own household (something that Netflix’s terms of service say is not allowed).

Sarandos was asked by BofA Securities analyst Jessica Reif Ehrlich, who conducted the Q4 earnings interview, about whether Netflix was interested in acquiring WWE, after founder Vince McMahon has returned to the company and is actively seeking to sell the wrestling-entertainment outfit. He responded to the question about WWE by saying “we have a lot of M&A activity all the time, we look at all of them, but nothing we can comment on.”

Sarandos reiterated his talking points on the subject. “On sports, our position has been the same, which is we’re not anti-sports, we’re pro-profits and we have not been able to figure out how to deliver profits in renting big league sports in our subscription model. Not to say that that won’t change, we’d be open to it, but that’s where it’s at today.”

Asked about whether Netflix was interested in offering a free, ad-supported TV (FAST) service. “Look, we’re open to all these different models that are out there right now, but we have a lot on our plate this year,” he said, adding that “we’re keeping an eye on that segment.”

Netflix executives also were asked about the release of Rian Johnson’s “Glass Onion: A Knives Out Mystery.” According to the streamer, it is the fourth most-watched film ever on the platform in its initial release (after “Red Notice,” “Don’t Look Up” and “Bird Box”) with 273.2 million hours viewed in the first 28 days on the service.

“We’re thrilled with every aspect of the release of ‘Glass Onion,’” Sarandos said. With the limited theatrical release, he said, “We created a bunch of demand that we fulfilled on our subscription service.”

Sarandos dismissed Reif Ehrlich’s suggestion that the company left money on the table by taking “Glass Onion” out of theaters after one week. He stressed that the company’s core focus is driving members to content on the streaming platform: “Everything else is really a tactic to drive excitement around those films.”

Meanwhile, Netflix is experimenting with fitness content — announcing a pact with Nike in December for a workout series — after avoiding it for years because so much of it is widely available online for free, Sarandos said. He called the company’s partnership on short-form fitness content with Nike “a really good test” with a top-tier partner. “Do people want to use Netflix to get back into shape? If they do, we’d like to keep serving that,” he said.

At the end of the interview, Hastings noted he’s been on 83 earnings call for Netflix, with Thursday’s interview his last.

“Overall, I would say, our first 25 years were good. And I’m super excited about Netflix’s next 25 years being great under our broadened leadership team,” he said. Earlier on the call, Sarandos commented, “In 22-plus years, Reed has positively changed my life in every way imaginable.”

Jennifer Maas and Cynthia Littleton contributed to this report.

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