Netflix said its password-sharing crackdown boosted its third quarter subscriptions above expectations as the company plans to increase prices to push subscribers toward its developing advertising tier.
The streaming giant added 8.8 million subscribers in the third quarter — the most significant quarterly customer gain since the second quarter of 2020.
Despite the concerns about the ongoing actor’s strike, which the company’s executives described as “challenging” in a note to investors, the strong earnings report helped move Netflix’s stock up more than 12% in after-hours trading on Wednesday.
The company is increasing prices in the U.S., with the basic plan going from $9.99 to $11.99 and the premium plan from $19.99 to $22.99. Similar adjustments are happening in the U.K. and France. This move aligns with streaming services’ shift towards better profitability, departing from the lower subscription fees that initially attracted users away from costly cable bundles during the early streaming era.
“We seek to have a wide and even wider overtime change of price points,” said Netflix co-CEO Greg Peters in a conference call about the company’s earnings report. “Part of that wide spread is that low entry price point, which we’ve kept static.”
While fewer than 6% of Netflix U.S. subscribers are in the company’s ad-supported tier, Netflix’s ads membership increased nearly 70% quarter-over-quarter and now accounts for 30% of all new sign-ups in its 12 ad countries.
“The shift to the ad-supported tier really helps drive up the subscriber ceiling in each market,” said Richard Broughton, an Executive Director at Ampere Analysis, who covers the television, film, and communications industries. “The ad-supported tier is a great way to ensure that every reachable household is converted into paid subscribers.”
Netflix reported revenue of $8.54 billion, roughly in line with its projections of $8.52 billion and up 8% from $7.9 billion in the third quarter last year.
Net profit rose 20% to $1.68 billion in the third quarter, topping its forecast. The company’s operating margin during the period was 22.4%, slightly higher than forecasted.
While the price increases are meant to help spur growth for Netflix’s ad-supported tier, the company said it’s also taking several approaches unique from its competition to make the package more enticing to subscribers.
The new package allows subscribers to run two simultaneous streams and offers higher-quality video. Next month, ad-supported plan users can download content, a new feature. In the coming year, binge-watchers can enjoy advertiser-sponsored commercial-free episodes, Netflix said.
Netflix has adjusted its spending due to the resolved Hollywood writers’ and ongoing actors’ strikes. Instead of the previously anticipated $17 billion, Netflix now plans to invest approximately $13 billion this year.
As a result, the company expects its free cash flow for the year to rise to $6.5 billion, surpassing the earlier forecast of $5 billion.
But as the company moves forward, a deal with the striking actors union SAG-AFTRA doesn’t appear close.
“We want nothing more than to resolve this and get everyone back to work,” said Netflix co-CEO Ted Sarandos during the earnings call.