Netflix pledges to remain ad-free even as U.S. subscriptions slip
Netflix did its best Wednesday to quash speculation that it will start running advertising, even as subscriber growth cools.
The streaming video giant reported revenue of $4.9 billion in the second-quarter, which was up 26 percent year-over-year. As it reported earnings, the company also tackled nagging rumors that it would look to bolster revenue in the future with an ad business.
“We, like HBO, are advertising free,” the company said in a letter to shareholders. “That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. 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.”
Meanwhile, Netflix said that its U.S. subscriber base dipped slightly. Paid memberships in the U.S. stalled at 60 million in the second quarter, down 126,000 from the first quarter.
Worldwide subscribers grew 22 percent quarter-on-quarter to 151.6 million. The worldwide growth of 2.7 million new accounts was lower than the 5 million the company had predicted in April. The company's stock price dipped 12 percent in after-hours trading to $319 a share.
For years there has been talk that Netflix would one day insert ads into people’s favorite shows like “Stranger Things” and “Black Mirror.” The programs often contain blatant product placement, such as Coca-Cola’s prominent role in the latest season of “Stranger Things,” but there are no traditional commercial breaks.
Netflix could lose 23 percent of its subscribers by subjecting them to commercials, according to a recent study from Hub Entertainment Research. That kind of drop-off could be one reason the company is eager to address the talk of ads.
Netflix is in a competitive video space, up against not only Amazon Prime, HBO and the upcoming Disney Plus, which are ad-free, but also competing with ad-supported video on demand from Hulu, YouTube, Facebook and others. At a time when Netflix could be hitting a saturation point with subscribers, it could need to find new areas for growth, advertising being an obvious option.
The company has sent mixed signals, too. In January, CEO Reed Hastings touted product placement potential during a video for Netflix’s fourth-quarter earnings report, and he held up boxes of cereal from Kellogg and Quaker. Hastings was showing how the food brands were featured in an innovative choose-your-own adventure program called “Bandersnatch,” where viewers decided which cereal the character ate. But at the same time, Netflix has often said it does not get paid for product integrations.
In a video call for investors Wednesday, Hastings addressed whether product placements would be a focus for making money going forward. Hastings said brand partnerships are just a "side car" to the main engine of the company's growth.
"What we want to do is keep that engine going, keep that subscriber engine going, and not get distracted with alternative revenue sources which just don't add up," Hastings said.
Netflix founder Ted Sarandos then added that the flood of products in the latest "Stranger Things" was not about money, but creativity, claiming it was a nod to the time period in which the show takes place.
"Think about all those product partnerships as a character," Sarandos said. "Remember the show is set in 1985, and it's set in the heart of when the big summer blockbuster movies were jammed with product placement."
Contributing: Anthony Crupi.