Netflix plans to offer cheaper, ad-supported tiers to consumers over the next year or two, the world's largest on-demand video streaming service said Tuesday, as it looks to boost its subscriber base amid stiffer competition from rival firms.
The firm, which reported a loss of 200,000 subscribers in the first quarter, will introduce the ad-supported plans to give customers more choice, company co-chief executive Reed Hastings said on an earnings call.
The upcoming ad-supported plans will mark a major shift in how Netflix has previously viewed advertisements in its 25-year history, in which it has amassed almost 222 million paying customers.
Netflix has been asked repeatedly over the years if it would ever consider bringing ads to its platform, an idea it has always shot down. At a conference in 2017, Hastings suggested the company was not well-suited to compete with the likes of Facebook and Google on ads.
Hastings acknowledged the sea change today, saying the ad model has matured enough and proven successful for rivals such as Hulu and Disney. "We don't have any doubt that it works," he said.
Disney has long offered an ad-supported tier on several of its services, including its Asia-focused streamer Hotstar. The company said last month that it plans to launch an ad-supported Disney+ plan in the U.S. later this year.
"Those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription," Hastings said. "But as much as I'm a fan of that, I'm a bigger fan of consumer choice."
"Allowing consumers who would like to have lower price and are advertising tolerant get what they want makes a lot of sense," he said, adding that the company is not viewing the ad-supported model as a "short-term fix."
Customers who don't wish to see ads will continue to be offered ad-free plans, he said.
"In terms of the profit potential, definitely, the online ad market has advanced and now you don't have to incorporate all the information about people that you used to. So we can be a great publisher and have other people do all the fancy ad-matching and integrate all the data about people ... so we can stay out of that," he said.
The move to adopt advertisement, which many analysts have long argued that Netflix should have explored earlier, follows Netflix's aggressive experimentation with pricing in many markets including India, Indonesia and Kenya in recent years to expand the reach of its service.
In December, Netflix introduced its most affordable monthly pricing tier to date in India, where individuals can subscribe to Netflix for as low as ₹199 ($2.6). The company last year offered a free mobile plan in Kenya. The company said it is "seeing nice growth" in a variety of markets including India.
Netflix reported its first subscriber loss in more than a decade on Tuesday and said it expects to lose 2 million more global subscribers in the current quarter. The company's shares fell as much as 27% to $256 apiece in extended trading.
The company's revenue grew 10% to $7.8 billion, also falling short of Wall Street expectations of $7.9 billion. The company acknowledged that its revenue growth had "slowed considerably."
“Our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds,” it said in a statement earlier Tuesday.
The company blamed a number of factors for the decline in its subscriber base. It said the slowdown is a sign of saturation in its major markets. It also acknowledged the growing competition from rivals such as Disney, Paramount and Warner Bros. The company also noted that more than 100 million users watch Netflix by borrowing credentials from others.
On its earnings call, the company said this large base of users who don't pay for the service currently is an attractive audience to convince into converting into subscribers or having their friends and family pay more.