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Localisation needs to support paid sharing as the key revenue growth driver for Netflix

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by Tim Mulligan

Netflix finds itself at yet another inflection point as it rolls out its paid sharing plan in the US. With a saturated domestic market (32% of paid members in Q1 2023 were from North America), finding additional subscribers means pushing subscription dodgers onto the recently launched basic with ads tier (note that this equates to the monthly subscription cost of Disney+ when it launched as an ad-free service in 2019). In pursuit of this, Netflix has begun sending out messages to subscription sharers on differing IP addresses requesting those “sharing between households” migrate to the paid sharing plan which is a full $1 more expensive than basic with ads. Effectively, Netflix has decided to prioritise the incremental revenue gains of ad-supported SVOD over the potential revenue upsides brought in by the paid sharing plan.

Netflix’s 74.4 million paid subscribers in Q1 2023 is equivalent to a 24.2% penetration rate for the 16+ population in the US and Canada. However, Netflix weekly active use (WAU) reached 50% in the US in Q2 2018 (Source: MIDiA Research quarterly consumer surveys) and has consistently been above that figure ever since. Complicating this penetration divergence is the existence of family plans, which MIDiA has stripped out in its analysis of what the addressable marketplace will be for Netflix subscription dodgers. At the same time, Netflix is under pressure to deliver on the launch of its basic with ads hybrid SVOD model – a direct response to pressures from investors to respond to changing subscription monetisation models amid a downturn in US memberships in Q1 2022.Localisation offers a meaningful additional revenue focus beyond enforcement

A heavy hand on policing engagement risks alienating Netflix’s younger, more price conscious, consumers (MIDiA’s Q1 2023 consumer survey revealed that over a third of US 20–24–year–olds stated that they would be prepared to reduce monthly spending by cancelling their Netflix subscription). Offsetting this risk requires focusing on ways to incrementally grow subscription revenue by making Netflix more like what it spent a long time disrupting – traditional pay-TV. For streaming TV to be optimised, it needs to do what traditional TV does best: focus on delivering a blend of internationally and domestically relevant content. That being said, domestic for Netflix now includes all of their 190+ operating territories.

The big opportunity here for Netflix is to focus on the regions that will drive the most subscription revenue growth and membership growth over the remainder of this decade –  namely Europe, Middle East, and Africa (EMEA), and Asia Pacific (APAC). Within EMEA, Europe presents a promising opportunity for revenue optimisation. Netflix can maximise its potential by adopting a country–by–country approach rather than considering Europe as a homogeneous market similar to the US. Developing a more sophisticated go-to-market approach here will rely on format innovation, content investment, and a recognition that the free-to-air model of broadcast is much more broadly entrenched in Europe than was ever the case in the US. For APAC, a focus on the converse is true – a focus on localised content will be critical to drive local adoption among digital leap-frogging and aspirational younger consumers.The maturing Netflix model needs to be recalibrated to reflect the increasingly localised nature of consumption, regulation, and monetisation that is currently rippling through the global entertainment marketplace. Both the stick and the carrot apply equally for Netflix going into H2 2023.

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