After two consecutive quarters of subscriber decline, Netflix said its prospects look brighter for the second half of the year as it prepares to launch a cheaper streaming plan with ads.
The Los Gatos, Calif.-based streamer added 2.4 million subscribers in the third quarter, beating projections by the company and Wall Street. Netflix said it expects to add an additional 4.5 million customers in the fourth quarter.
“After a challenging first half, we believe we’re on a path to re-accelerate growth,” Netflix said in a letter to shareholders on Tuesday.
The company posted revenue of $7.9 million in the third quarter, up 6% from a year ago. Net income was nearly $1.4 billion, about flat compared with the third quarter of last year. Still, the results slightly beat analysts’ expectations.
While the pace of subscriber growth is slower than the early days of the pandemic, analysts are hopeful the new cheaper ad-supported plan will attract more customers to the streaming service.
In a radical departure from its longstanding practice of eschewing commercials, Netflix will offer a $6.99 monthly subscription next month that includes 15-second to 30-second ads before and during programs. The program will launch in 12 countries outside the U.S., including nine where Netflix has a less than 50% penetration of broadband households, according to a Guggenheim Securities report.
“In combination with the continued development and release of local-market content, we believe the lower-priced ad-supported tier offers an outsized potential for membership growth in these countries,” wrote Michael Morris, a Guggenheim equity analyst in the report who has a buy recommendation on the stock.
Over the years, the company had resisted advertising, but as its competitors, including Hulu and HBO Max, have offered cheaper plans with ads, Netflix faced growing pressure to follow suit.
In its third quarter, Netflix shows such as “DAHMER: Monster: The Jeffrey Dahmer Story” became its second most viewed English language TV show, with more than 824 hours of watch time since it launched on Sept. 21. The company touted its ability to have high engagement with its viewers.
“We believe the ability for our members to immerse themselves in a story from start to finish increases their enjoyment but also their likelihood to tell their friends, which then means more people watch, join and stay with Netflix,” the company said in a letter to shareholders on Tuesday.
Other highlights from the quarter included the launch of the popular “Stranger Things 4,” which generated 1.35 billion hours of watch time; and “Cobra Kai,” with 270 million hours viewed; and Korean language series “Extraordinary Attorney Woo,” generating up 402 million hours of watch time in its first 28 days, Netflix said.
The company also continues to invest in other areas, including gaming. It currently has roughly 35 games and 55 games in development.
Although it remains the dominant subscription streaming service, Netflix’s percentage of U.S. Internet streaming revenue will fall to 29% by the end of the year, according to research service Insider Intelligence. In 2018, Netflix represented 49% of that category of revenue, Insider Intelligence said.
“Amidst this formidable, diverse set of competitors, we believe our focus as a pure-play streaming business is an advantage,” Netflix said in its shareholder letter. “Our aim remains to be the first choice in entertainment, and to continue to build an amazingly successful and profitable business.”