Netflix shifts focus to growing ad tier as subscriber growth slows

Netflix likely added the fewest number of subscribers in five quarters during April-June as sharp gains following a crackdown on password sharing ebbed and viewer attention moved to summer sporting events including the Euro soccer tournament.

The company added an estimated 4.82 million subscribers in the second quarter, according to LSEG data. That would be the lowest additions since the first quarter of 2023 and about half the 9.3 million it added in the previous three months.

Still, the streaming giant's efforts to sell a lower-priced ad-supported tier have yielded strong ad revenue growth. The company's ad revenue is expected to have more than doubled in the June quarter. Overall revenue likely rose 16.4% to $9.53 billion, marking the fastest growth since the second quarter of 2021.

Netflix's original shows such as the historical romance "Bridgerton" and the limited series "Baby Reindeer" - based on comedian Richard Gadd's experience with a stalker - topped most-watched charts in the second quarter, according to Nielsen data.

When it reports second-quarter results on Thursday, investors will scrutinize the streaming giant's efforts to expand its lower-priced plan with advertising and look for updates on new growth drivers.

In May, the company said its ad-supported tier reached 40 million monthly active users across the globe and accounted for 40% of all sign-ups in the countries it was available, up from 23 million in January. The ad push has resonated with investors. For the year, Netflix's stock is up nearly 35%, compared with a return of about 19% on the S&P 500 index. 

Seasonally, viewership during summer months for Netflix and its rivals such as Disney+ also takes a hit as people Travel. This year, the Olympic Games that begin on July 26 are also expected to draw some viewers away from Netflix, according to analysts.

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After investing heavily in originals, brokerage MoffettNathanson noted Netflix is also able to drive viewership with its competitors' content. Eighteen of the top 20 streamed titles were acquired shows, such as "NCIS" or "Grey's Anatomy," it noted.

Netflix has also announced bundling partnerships. Comcast is offering Netflix with its Peacock streaming service and Apple TV+ for its Xfinity internet and TV customers.

Netflix is also hosting more live content, including its deal to stream two National Football League games on Christmas Day, to create advertiser-friendly events.

"More live-event announcements will ensue as the company looks to improve its ad-supported time spent, amid an industry-wide reduction in scripted content production," Ross Benes, senior analyst at Emarketer, said.

To drive the next phase of growth, Netflix announced plans in May to build an in-house ad Technology platform that will offer marketers more ways to buy commercials and measure their performance. It initially leaned on Microsoft to build the bacKBOne of the ad tier.

"Despite this progress, we continue to view advertising as a longer term story and do not expect a material revenue contribution until 2025," BofA Global Research analyst Jessica Reif Ehrlich said in a note on Monday.