Netflix shifts focus to engagement metrics amid crackdown on password sharing

Netflix

Netflix has seen a rise in subscribers and a boost to profits as a result of its crackdown on password sharing.

The streaming platform gained 9.33 million new memberships in Q1, which is 7.5 million more than last year. The number of ad-funded memberships also increased by 65% compared to the previous quarter, bringing the total subscriber base close to 270 million.

During the same period, revenue saw a 15% growth, reaching $9.4 billion (£7.6 billion) by the end of March. Net income also rose significantly by 79% to $2.3 billion (£1.85 billion) compared to the same quarter in 2023.

On the Q1 earnings call, Netflix's CFO, Spencer Neumann, mentioned that the company is working on establishing a more solid and sustainable foundation for revenue growth among a larger group of paid members. This new foundation is expected to result in a robust and highly engaged audience that can be tapped into for advertising purposes in the future.

Starting in the first quarter of 2025, Netflix plans to no longer report paid quarterly membership and revenue per subscriber. Instead, the company will focus on measuring engagement as a key metric, considering it the best indicator of customer satisfaction. This will be in addition to traditional financial metrics like revenue and operating margin.

We prioritize engagement because we see it as a key measure of how satisfied our customers are with our services. Additionally, it plays a crucial role in predicting customer retention and acquisition in the long run. Theodore Sarandos of Netflix also emphasizes the importance of focusing on engagement.

Netflix has stated that in the early days, when the company had little revenue or profit, it was crucial to discuss membership growth as it was a strong indicator of future potential. Now that the company has generated significant profit and free cash flow, as well as expanded revenue streams like advertising, Netflix believes it is the right time to stop reporting this number.

Theodore Sarandos, co-CEO and director, emphasized the importance of focusing on engagement. He mentioned that engagement is considered the best indicator of customer satisfaction with their offerings. Additionally, it serves as a leading indicator for retention and acquisition over time.

Understanding engagement

The company found out that over 100 million people were using an account without paying two years ago. In the middle of last year, the platform started taking action against UK users who were sharing passwords and stopped offering its basic plan in the UK and Canada.

The crackdown has started to make a difference. Gregory Peters, the co-CEO, president, and director, mentioned that the upcoming engagement report will reflect some impact on the total number of view hours.

The company aimed to compare engagement in a fair way, so they looked at the audience that was not affected by paid sharing.

In Q1 of 2024, the number of hours viewed per account remained consistent compared to the same quarter a year ago. This indicates that our engagement is staying strong and helps to highlight the positive impact amidst the discussions regarding paid sharing.

The company also highlighted its focus on investing in live events. With TV viewing accounting for less than 10% in every country, Netflix sees an opportunity to enhance the experience for our members and increase our share of viewing by introducing more live comedy, sports, competition shows, and music.

Sarandos highlighted the upcoming live boxing match between Jake Paul and former heavyweight champion Mike Tyson as a "must-watch event this summer." He expressed belief that these types of eventised cultural moments are the kind of television they want to be involved in, aiming to captivate their members with such moments.

Editor's P/S:

Netflix's crackdown on password sharing has proven to be a successful strategy, resulting in a significant surge in both subscribers and revenue. The company's focus on establishing a sustainable foundation for revenue growth through a larger paid membership base is commendable. By prioritizing engagement as a key metric, Netflix is demonstrating its commitment to providing a satisfying experience for its customers.

Additionally, Netflix's expansion into live events is a promising move that could further enhance the value proposition for its members. The company's understanding of the changing viewing landscape and its willingness to invest in innovative content formats position it well for continued growth and success in the future.