Netflix looks to take market’s eye off the subscriber count

Reporting strong Q1 numbers, Netflix has confirmed that aims to stop reporting quarterly membership numbers in Q2 next year, having turned its attention to “revenue and operating margin as our primary financial metrics and engagement.”

Why it is doing so was the first question to arise from the company’s always carefully curated earnings call Q&A, where corporate development and investor relations VP Spencer Wang fields questions from analysts and relays them co-CEOs Greg Peters and Ted Sarandos.

Peters’ answer was that things have evolved. Raw subscriber numbers no longer tell the full story.

“We’ve evolved and we’re going to continue to evolve, developing our revenue model and adding things like advertising and our extra member feature, things that aren’t directly connected to number of members,” said Peters.

“We’ve also evolved our pricing and plans with multiple tiers, different price points across different countries. I think those price points are going to become increasingly different. So each incremental member has a different business impact. And all of that means that, that historical simple math that we all did, number of members times the monthly price, is increasingly less accurate in capturing the state of the business.”

Netflix’s letter to investors told a similar story, saying that with “very substantial profit and free cash flow” now established, in addition to “developing new revenue streams like advertising and our extra member feature,” the number of memberships had become “just one component of our growth.”

It added: “In addition, as we’ve evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact.”

Netflix will continue to provide a breakout of revenue by region each quarter. However, despite the emphasis on “multiple tiers” and advertising, it will not report average revenue per member.

Netflix has of course for some time been trying to draw the attention of analysts to metrics other than subscriber numbers. It may seem counterintuitive for the company to reveal that it is planning not to tell how many subs it has signed up after a quarter in which it added an impressive 9.3 million new customers, but the company’s management are obviously painfully aware of how sensitive market sentiment is to this particular KPI.

Netflix’s current strong subscriber growth is also tied to a large extent to its crackdown on password sharing. This continues to be the gift that keeps on giving for the company. On the call, CFO Spencer Neumann said that revenue growth going through the rest of this year would be “pretty similar to what you see in Q1”, “where it’s primarily driven by member growth because of the kind of full year impact of paid sharing rolling through the year and continued strong acquisition and retention trends”.

The uplift from the crackdown on credential sharing is not, however, going to last forever. It will tail off over the next year, so the likelihood is that subscriber growth will slow. Making more money from individual subscribers will become more important, despite the assertion that Netflix’s base still accounts for only a small proportion of the overall global TV-viewing population.

Key to that is the advertising-supported tier. However, revenue growth from this is not expected to ramp up quickly. Neumann said that “we’re also growing our ads tier at a nice clip” but that “monetization is lagging growth” in this area.

The overall messaging is that changing the mix of revenues from a pure one-size-fits-all subscription model to a more nuanced model takes time.

In addition to the upside from advertising and the sugar-rush of the password sharing crackdown, Netflix is emphasizing engagement, which feeds into retention. The overall impression given is that Netflix is now becoming much more like a traditional pay TV business.

Market reaction to the news that the company would no longer give out subscriber numbers was predictably negative, however.

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