Netflix insists on ad-free future despite huge miss in subscriber growth

Netflix: partnered several brands to launch new season of Stranger Things
Netflix: partnered several brands to launch new season of Stranger Things

Streaming service faces 'fierce' competition and difficult decision on pricing strategy.

Netflix has insisted that it will remain advertising-free despite falling well short of its own subscriber growth expectations.

Shares in the streaming service dropped by more than 10% in extended trading after Netflix reported that it had added 2.7 million paid subscribers for the second quarter of 2019.

Analysts had expected a gain of 5.3 million subscribers, while Netflix itself had forecast five million.

The platform admitted that it faces "fierce" competition against Amazon, Hulu, the BBC and YouTube. Disney, Apple, NBCUniversal and WarnerMedia are all expected to offer streaming services in the US within the next year. 

Despite the competition, Netflix dismissed market speculation that it is moving into advertising and reiterated that being ad-free remains a key part of its proposition. 

In a letter to shareholders, Netflix said: "We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction."

Netflix now has 152 million subscribers globally, up 22% year on year. It said its missed forecast was across all regions, but "slightly more so" in those where it had increased prices.

In May, Netflix increased prices in the UK for the first time in nearly two years: a standard monthly tariff went up by £1 to £8.99. The company faces a difficult balancing act of needing to increase prices with an ad-free model while remaining competitive. Disney, for example, will launch with a $7 (£5.52) monthly service, while Netflix’s standard subscription costs $11 a month in the US. 

Netflix went on to explain that it does not believe competition was a factor in slower-than-expected subscriber growth, but more due to content.

In the US, Netflix’s biggest market, its paid membership was "essentially flat" in the second quarter of 2019. It expects subscriber growth of seven million in the third quarter, fuelled by the launch of new series for Stranger Things, The Crown and Orange is the New Black.

Between 1 April and 30 June, Netflix pulled in $4.92bn in revenue (26% growth year on year) and a net income of $271m. 

Netflix, which does not break down its revenue between subscriptions and income from brand partnerships, also said its marketing has evolved to promoting its original content rather than the breadth of its overall offering. The company has also hired its first chief marketing officer, Jackie Lee-Joe, who is tasked with taking its marketing "to the next level".

Recent brand partnerships (which include product placement, above-the-line ads and experiential activity) include this month's launch of series three of Stranger Things, tying up with Coca-Cola, Nike, Burger King and Baskin-Robbins. It also launched a Stranger Things mobile game at the E3 conference.

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