Netflix adamant on commercial-free offering despite missing membership forecasts

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Netflix’s paid membership grew by 2.7 million in the second quarter of 2019, less than the 5.5 million in the same period a year ago and its five million forecast. But despite its challenges the company remains steadfast on staying “advertising free”.

In a statement to shareholders, the company explained that being ad-free remains a “deep part of [its] brand proposition”, and it believes it 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.

When you read speculation that we are moving into selling advertising, be confident that this is false.

As Netflix shifts to original content, it has been evolving its marketing efforts to increasingly focus on launching its key titles to build excitement amongst existing and non-members, said the company. Therefore, it plans to continue its investment in owned and earned media, where we can have strong, direct relationships with fans.

“We’re also building out our licensing and brand partnerships effort, which is optimising for fan and viewer engagement over revenue maximisation,” it added, citing partnerships for the launch of Stranger Things season 3 with brands such as Coke, Nike, Burger King, and Baskin Robbins.

Recently, Netflix also announced a new Stranger Things mobile game, a game based on its upcoming new show Dark Crystal: Age of Resistance (a prequel to the 1982 film), and a partnership with Epic Games, the developers of Fortnite. However, it clarified that the games are designed to build fandom for its titles similar to its other merchandising initiatives and “don’t signal a push into gaming as a new business” for Netflix.

According to the company, it missed its paid membership forecast across all regions, and the gap is “slightly more so in regions with price increases”.  However, it expects to grow paid memberships by seven million in the third quarter, more than the 6.1 million a year ago, in view of the “remarkable” shift from linear television to internet entertainment.

Despite the slowdown, average streaming paid memberships increased 24% year over year. “We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region),” said Netflix. The company attributes the poor performance to less-than-ideal growth in net adds from Q2’s content slate. Additionally, Q1’s high performance of 9.6 million net adds had led to a more optimistic forecast.

Meanwhile, revenue growth accelerated 400 basis points to 26%, and operating income increased 53% year over year in Q2. According to the statement, operating margin of 14.3% was higher than Netflix’s beginning-of-quarter forecast as some marketing spend was shifted into the second half of the year.

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