Netflix Explores a Version With Ads as Subscriber Base Shrinks

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In a Tuesday analyst interview to discuss the company’s first quarter-results, Netflix Chairman and Co-Chief Executive Reed Hastings said an ad-supported version of Netflix makes a lot of sense.

“Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Mr. Hastings said. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice.”

Netflix earlier in the day said it ended the first quarter with 200,000 fewer subscribers than it had in the fourth, missing on its own projection of adding 2.5 million customers in the period. Netflix said it expected to lose two million global subscribers in the current quarter.

Netflix shares were 25% lower in after-hours trading. Through Tuesday’s close, the stock has declined by more than 40% so far this year.

The company blamed password sharing among its members and increased streaming competition for pressuring revenue growth. Netflix estimated that besides its almost 222 million paying households, the service is being shared with an additional 100 million homes including 30 million in the U.S. and Canada.

In its letter to investors, Netflix said it is testing password-sharing subscription models that it believes will allow it to monetize sharing and build revenue. Mr. Hastings said password sharing combined with competition “is what we think is driving the lower acquisition and lower growth.” He added that when Netflix was growing fast, trying to reduce password sharing “wasn’t a high priority to be working on.”

The streaming company said revenue growth has slowed considerably after years of 20%-plus gains. Revenue in the first quarter rose roughly 10% to $7.87 billion, below analysts’ projections of $7.93 billion.

Netflix warned that gains made during the Covid-19 pandemic hid the fault lines that have emerged in its business over the past few years. “Covid clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the Covid pull forward,” the company said in its letter.

With a rate of growth that has been the envy of the industry for more than a decade, Netflix has long been seen as a barometer for streaming, and any challenges it faces might have broader implications for its rivals.

Netflix’s subscription decline brought its paid global subscriber base to 221.6 million, down from 221.8 million in the prior quarter. Net profit was $1.6 billion, down from $1.71 billion a year earlier.

Besides competition and password sharing, Netflix said slowing growth reflected such factors as the rate of adoption of smart TVs, data costs and world events including increasing inflation, Russia’s invasion of Ukraine and continuing disruption from the pandemic.

Netflix said shutting down its service in Russia resulted in the loss of 700,000 subscribers.

As competition grew and programming costs rose, the company moved recently to raise the price for its monthly plans for the first time since 2020.

Referring to Netflix’s performance, Mr. Hastings said, “What we gotta do is take it up a notch” to “get back in our investors’ good graces.”

The growing number of streaming options has made consumers more price- sensitive. Netflix is among the few major streaming services that had yet to entertain offering a cheaper, ad-supported option. Walt Disney Co. ’s Hulu has long done so, while Warner Bros. Discovery Inc.’s HBO Max and Disney+ have also pushed into ad-supported streaming.

Netflix’s first-quarter operating margin was 25.1%, down from 27.4% a year earlier. The company said it aims to keep its operating margin at 20% in the future.

Netflix said its plan to right itself will be heavily focused on improving the quality of its programming and the recommendations that platform provides to its customers to keep them engaged in the content and on the service. Netflix already spends more than any other entertainment provider, with a programming budget that is expected to surpass $20 billion this year.

Although Netflix has several hit shows including “Stranger Things,” “Bridgerton” and “The Crown,” the service has also had its fair share of expensive flops recently including “Jupiter Ascending” and “Space Force.”

“We need to have an ‘Adam Project’ and a ‘Bridgerton’ every month,” said Co-Chief Executive and Chief Content Officer Ted Sarandos during the analyst interview.

World-wide, Netflix said its business in Central and Eastern Europe showed the effects of Russia’s attack on Ukraine. Also down was Latin America, which lost 400,000 subscribers. In the U.S. and Canada, the company lost 600,000 subscribers, which it attributed to its recent price increase.

The company said it had grown in Japan, India, the Philippines, Thailand and Taiwan.

“Over the longer term, much of our growth will come from outside the U.S.,” Netflix said.

Write to Joe Flint at joe.flint@wsj.com and Denny Jacob at denny.jacob@wsj.com

Corrections & Amplifications Spencer Neumann is Netflix’s chief financial officer. An earlier version of this article incorrectly said he is chief operating officer. (Corrected on April 19)