After a quarter that saw Netflix roll out paid sharing in more than 100 countries, the streaming giant on Wednesday reported subscriber growth across its markets, netting 5.9 million additions globally in Q2.
That includes adding 1.17 million domestically in the U.S. and Canada. Netflix also gained nearly 1 million or more net additions in each of its three other major markets including EMEA where it added 2.4 million, LATAM, where it added 1.2 million, and APAC, which brought in 919,000 net subscribers.
Netflix in May launched paid sharing the U.S. and other markets, charging users $8 per month in the U.S. to add an extra member that lives in a separate household. At a relatively high price point, analysts have pointed out the policies are likely designed to drive new signups as well as adoption of the lower-priced plan with ads.
Before the broad password sharing crackdown, Netflix in Q1 added just 102,000 subscribers in the U.S. and Canada, while other markets contributed the remainder to its total of 1.75 million global net adds in the three-month period. That followed 2022, when Netflix counted domestic subscriber losses in Q1 and Q2 and ended the year with 919,000 net losses in the U.S. and Canada.
Netflix’s global base now stands around 238 million, up 8% from the 221 million it had at the end of Q2 2022. Despite the subscriber gains, Netflix stock slid more than 3% after hours following the second-quarter earnings report.
And paid sharing is now rolled out in countries representing more than 80% of Netflix’s revenue base, with the streamer on Wednesday starting to address account sharing between households in almost all of its remaining countries.
How exactly Netflix will approach or enforce a password sharing crackdown in the remaining countries, or how widespread the issue is, wasn’t immediate clear, but it appears it involves requiring new accounts. The SVOD, in a letter to shareholders, noted it’s not going to offer an extra member option in remaining countries due to the fact that it recently cut prices in many and still has relatively low penetration, meaning plenty of room to grow without those policies. The company did say that households borrowing the SVOD in remaining countries will be able to transfer profiles to new and existing accounts.
Netflix didn’t break out how many users have opted for the extra member charge versus signing up for a new account, including on its plan with ads. Netflix is likely to address more details about paid sharing on its earnings call scheduled for later Wednesday, but the shareholder letter indicated it hasn’t seen a ton of people cancelling the service altogether in its major markets as a result. Netflix said that revenue in each region is now higher than pre-launch of paid sharing and signups are already outpacing cancellations.
“The cancel reaction was low and while we’re still in the early stages of monetization, we’re seeing healthy conversion of borrower households into full paying Netflix memberships as well as the uptake of our extra member feature. We are revenue and paid membership positive vs. prior to the launch of paid sharing across every region in our latest launch,” the letter to shareholders said.
In Q2 Netflix saw revenue increase 2.7% year over year to $8.2 billion with an operating profit of $1.8 billion was up 16%, in-line with the company’s forecast. Netflix said revenue growth was driven by a 6% increase in average paid membership, but 3% decline in average revenue per membership (ARM).
Netflix reported a Q2 operating margin of 22%, compared to 20% in the same period a year ago. Netflix expects revenue growth to pick up pace more in the second half of the year – and more substantially in Q4 – with subscriber volume expected to be the primary driver of revenue, alongside early impacts from monetizing sharing among households and growing ad revenue from its plan with ads. The streaming service is still targeting a full year 2023 operating margin of 18-20%.
Netflix previously estimated 100 million users (including around 30 million in the U.S. and Canada) were accessing Netflix without paying via password sharing. At the time of paid sharing launch, Wolfe Research analysts pointed to policies and pricing as designed to drive sign-ups for Netflix’s ad-supported tier that launched last November. Macquarie Research, meanwhile, previously projected that a paid sharing crackdown could catalyze growth on the ad-supported tier, potentially netting annual incremental revenues for the streaming between $1.17 billion and up to $3.5 billion in 2024.
Still, while new plans and policies are helping with subscriber growth, paid sharing only rolled out in May and the ad-supported plan still evolving. And Netflix doesn’t expect monetization from extra member fees or advertising to result in major boosts in average revenue per member (ARM) for Q3. Netflix is projecting $8.5 billion in revenue for Q3, driven by growth in average paid memberships, with Q3 net additions expected to be similar to what Netflix saw in Q2, and more substantial growth anticipated in Q4.
“We expect F/X neutral ARM to be flat to slightly down year over year, as we are lapping price increases in 2022 and we generally haven’t had price increases in our largest revenue markets since the first half of last year (limited during paid sharing rollout). Revenue from advertising and our extra member feature are not yet material enough to offset these factors,” Netflix wrote the letter to shareholders. Extra member accounts aren’t included in Netflix’s paid membership counts, but contribute revenue included in ARM.
In another move that could be meant to boost adoption on the plan with ads or push people into higher priced ad-free plans, Netflix, just ahead of its earnings release, did away with its cheapest ad-free plan. The Basic plan, which was priced at $9.99 per month in the U.S., is no longer offered to new or returning Netflix subscribers in the U.S. or U.K. – following the same move earlier in Canada in Q2. Netflix said existing subscribers of the Basic plan, “can remain on this plan until you change plans or cancel your account.”
In the letter to shareholders, Netflix said it believes entry prices on the plan with ads - $6.99 in the U.S., £4.99 in the UK and $5.99 in Canada – provides value to consumers.