Expanding Monetization Horizons: Netflix's Strategies for Growth and Profitability

In the third quarter of this year, Netflix's (NASDAQ: NFLX) performance was remarkable. The most talked-about aspect was the significant growth in their membership, which far exceeded expectations. However, few people delve into the underlying reality behind this achievement.

During the first three quarters of this year, Netflix's net profit reached US$4.47 billion, slightly higher than the US$4.44 billion recorded in the same period last year, resulting in a year-on-year increase of less than 1%. Surprisingly, the net profit for the third quarter accounted for nearly 40% of Netflix's total net profit for the entire three quarters. This suggests that there were some accidental factors at play contributing to Netflix's exceptional performance in the third quarter.

One such factor is the live-action comic drama "One Piece." Since its release, it has become the most-watched show in many countries worldwide. This success has solidified Netflix's position as the dominant drama provider for this year. Without popular content like "One Piece," initiatives such as advertising memberships or efforts to combat password sharing would have little impact on attracting a substantial number of paying users. This is especially true for Netflix, which already boasts approximately 250 million paying subscribers globally.

Furthermore, there are certain indicators in Netflix's performance that raise concerns. The company's revenue for the first three quarters of this year was US$24.89 billion, marking a mere 4.7% year-on-year growth. It's worth noting that Netflix has consistently achieved a compound annual growth rate of 15% in revenue over the past five years, making it one of the few high-growth stocks in the U.S. technology sector. However, the sluggish growth experienced during the first three quarters, coupled with the management's lowered revenue forecast for the fourth quarter, strongly suggests a significant decline in the company's full-year revenue growth.

Since Netflix has never paid dividends, the valuation of its stock price heavily relies on the market's assessment of its fundamentals. Netflix's fundamentals are relatively straightforward, revolving around the formula of "number of subscription members multiplied by the average payment amount." This algorithm allows for a high level of predictability in its performance. Therefore, one may question the long-term certainty of Netflix's success when a quarter of exceptional performance is largely attributable to chance factors.

Starting in October, the ad-free Disney+ service will experience a significant price increase, with the monthly fee rising from US$10.99 to US$13.99, representing a surge of over 27%. Similarly, the ad-free Hulu service will see its monthly fee increase from US$14.99 to US$17.99, marking an approximate 20% increase. Apple TV+ has also raised its monthly subscription fee from US$6.99 to US$9.99, while the annual package fee has surged from US$69 to US$99, indicating a significant increase of 42.9% and 43.5% respectively.

According to calculations by various media outlets, the average number of streaming media subscriptions in American households has reached 3.7. From a financial perspective, the average monthly expenditure on streaming media services may amount to nearly $100. Considering the additional costs resulting from inflation and the increased household debt due to interest rate hikes by the Federal Reserve, individuals in the United States must carefully manage their finances and make thoughtful decisions about their streaming media expenditures.

During such circumstances, having a wide range of price options becomes more appealing.

In late 2022, Netflix deviated from its previous stance against advertising and introduced a $6.99/month subscription plan that includes advertisements. This service expansion was planned to be introduced in 12 countries and regions this year. Additionally, Netflix has taken strict measures to combat account and password sharing. In order to access Netflix content, individuals must either pay for their own subscription or "share" a family account with other households (with the option to expand the account to accommodate up to 5 users).

In summary, if individuals want to access the content that they are interested in, they must be willing to pay for it.

Past facts have proven that consumers are much more receptive to advertising than higher subscription prices, and price-sensitive users have started to join Netflix in large numbers. In the third quarter of this year, the number of advertising members increased by nearly 70% compared to the previous month, and they currently account for approximately 30% of all newly registered members in the 12 countries/regions where advertising is available.

This trend gives Netflix a basis for further price increases. The lower-priced plans have attracted the remaining users, allowing Netflix to freely raise prices and earn more revenue.

In the third quarter, Netflix announced that starting from October this year, the price of the basic plan (for existing subscribers) will increase from US$10 to US$12, while the price of the premium plan (supporting 4K) will rise from US$20 to US$23. The prices of the advertising-included membership subscription ($6.99/month) and the standard plan ($15.49/month) remain unchanged, but the price gap between them and the premium version is now significant.



The increase from US$20 to US$23 is considered an "epic moment" for Netflix. The last time the price exceeded $20 was 20 years ago when Netflix was engaged in a fierce battle with Blockbuster, an American video rental company. Back then, Netflix learned a valuable lesson from a monthly price increase to $21, which resulted in a significant loss of users. If it hadn't been for a subsequent management dispute within Blockbuster, which almost led to its downfall, Netflix's fate might have been different.

After that failure, Netflix gradually increased its prices from just over a dozen dollars until now. Today, Netflix's position far surpasses that of Blockbuster in its heyday. The price of Netflix's premium membership already represents the upper limit for non-sports streaming services. With advertising subscriptions starting at $7 and advanced subscriptions reaching $23, Netflix has set the boundaries for subscription prices within the industry.

We have always emphasized that having the ability to sell products at both high and low prices is crucial in the business world. Netflix, as the leading streaming media platform worldwide, understands the importance of pricing power based on consumer preferences and content offerings.

Regardless of whether consumers can afford a premium, ad-free 4K entertainment experience or prefer a more cost-effective option with advertisements, Netflix aims to provide products and services that cater to different consumer needs. Ensuring accessibility for all consumers is a hallmark of an excellent company.

Content remains the most significant battleground for Netflix. To sustain profitability, Netflix must continue to produce compelling and high-quality content that resonates with its global audience.

Image Credit: Wikipedia/One Piece

In the third quarter of this year, Netflix's adaptation of "One Piece," a live-action manga series, may not have garnered the same immediate popularity as "Squid Game" and "Dark Glory" did earlier this year. However, considering its global influence and revenue contribution to Netflix, the popularity of "One Piece" can be described as explosive.

It is important to clarify that "One Piece" is a live-action adaptation of a manga series created by Japanese artist Eiichiro Oda, which has been serialized since 1998. With a cumulative sales record of 500 million copies, it holds the distinction of being the best-selling comic series in the world.

However, it is essential to note that a good original work does not guarantee a successful adaptation. The market performance of live-action adaptations of Japanese comics has often lagged behind that of their American counterparts. Among the Japanese comic IPs adapted by Hollywood, only the movie "Edge of Tomorrow" can be considered a success, while others, such as "Dragon Ball" (another well-known IP), have failed to achieve significant box office success or critical acclaim.

Even Netflix itself has encountered challenges in adapting Japanese comics. In 2021, Netflix's live-action adaptation of the Japanese anime IP "Cowboy Bebop" received mixed reviews and results, despite initial anticipation.

Following its release, "One Piece" secured the top spot on Netflix's global streaming list for three consecutive weeks and remained in the top ten for six weeks. It achieved a remarkable feat by claiming the number one position in 84 countries and regions during its opening weekend, surpassing the previous record held by "Stranger Things" Season 4. The reception of "One Piece" has been highly positive, with a score above 8.4 on IMDB, and a Rotten Tomatoes audience approval index above 96%.

The success of "One Piece" can be seen as both an unexpected outcome and a necessary milestone for Netflix. Years of consistent investment in international content, along with a commitment to nurturing local creative talents, have demonstrated that the streaming platform has the capacity to produce popular content even without relying on major IPs like "One Piece." An exemplary case is the enduring popularity of "Squid Game," which remains one of Netflix's most-watched series.

However, amidst Netflix's impressive capabilities, there is a pressing issue that impacts its profitability: costs.

The resolved Hollywood writers' strike and the ongoing actors' strike will inevitably lead to increased fees for actors and writers on streaming platforms. Moreover, as streaming media continues to gain global prominence, the demands for higher compensation from all industry workers are becoming more pronounced.

Nevertheless, there are strategies to mitigate the rising costs. One approach involves augmenting revenue by integrating online and offline services. Additionally, expanding monetization avenues provides another means to counterbalance increased expenses.

For instance, a movie can initially be released in theaters to generate box office revenue. Subsequently, revenue can be generated from DVD sales and online streaming through copyright fees. If the movie attains popularity, supplementary income can be earned through the sale of merchandise associated with the film. Similar opportunities exist for TV series. The classic American sitcom "Friends" continues to generate hundreds of millions of dollars annually, allowing its lead actors to benefit from ongoing profit-sharing arrangements.

To overcome the limitations of monetization faced by streaming platforms like Netflix, it is crucial to explore alternative methods. For instance, in 2019, Netflix produced the movie "The Irishman," which had a limited offline theater release for just a month before being quickly made available for streaming. It has been estimated that canceling offline screenings cost Netflix approximately US$200 million.

In contrast, the upcoming film "Killers of the Flower Moon," co-produced by Apple and Paramount Pictures, will adopt a different distribution strategy. It will have a longer theatrical run before being released on Apple TV+. The film has already garnered positive reviews, and if it achieves substantial success, it will serve as a successful experiment in merging online and offline streaming.

Expanding online content to offline platforms and diversifying monetization channels are effective ways to mitigate rising costs. Moreover, these strategies allow for shared investment, reducing the company's initial cash outlay and optimizing expenditure structures.

It is essential for Netflix's future growth to explore these areas and challenge the predictable status quo. By closely integrating with offline theaters and seeking innovative approaches, Netflix aims to make its stock price more oriented towards growth.

Currently, Netflix has announced plans to gamify popular series like "Squid Game" and "Wednesday." While the specific details of these games are still unknown, the introduction of gaming content opens up new revenue possibilities beyond membership fees. This represents a vast untapped market, offering a wider horizon for growth and profitability.