Netflix Might Make A Huge Change... And You're Going To Hate It

Netflix has a massive amount of subscribers - over 200 million in fact - but when you get that many customers, it becomes harder to get more. In fact, in the first quarter of 2021, they only added four million additional users. That same period in 2020, they saw an increase of 16 million. The executives at the company feel the drop was due to production issues caused by COVID - they couldn't put out compelling content since they didn't have a chance to create it during the pandemic, so they couldn't attract new customers. However, to keep growing, the company might have to do something they previously said they wouldn't do - include ads.

While streaming services like Hulu and Peacock each offer different tiers of pricing - one with ads and one without - Netflix has stated multiple times that they don't see a need to turn to advertising. CEO Reed Hastings explained, "It's a belief we can build a better business, a more valuable business [without advertising]... There's much more growth in the consumer market than there is in advertising, which is pretty flat." The company might want to rethink that though.

Michael Nathanson, an analyst with MoffettNathanson Research, told Broadcasting and Cable, "Although Netflix management continues to strongly dismiss the idea of advertising, we think that view will be seen as a strategic mistake if future rates of subscriber growth start to fall short of Street expectations."

Netflix is looking to pursue consumer products and gaming to help grow the company, but Nathanson doesn't feel that is the correct route to take, noting, "We don't think that consumer products or gaming will be enough to change the narrative. Rather, we think that an ad-supported tier or live sports would be the way to go to penetrate harder to reach customer segments and markets."

For now, it seems unlikely Netflix will switch to ad-supported revenue. They still have the potential to get millions of customers outside of the U.S. which will help their growth. However, once they hit a ceiling on subscribers, since they can't raise their subscription fees past a point that people aren't willing to pay, they then might need to turn to ads.

That day isn't here yet, but it is looming in the not-too-distant future.