Netflix lost 1 mn subscribers last quarter, still lower than the expected 2 mn subscribers.

For starters, Netflix earns a whopping $30 bn from its subscription business with 200 mn+ subscribers. But this is the first time in the last decade that Netflix lost subscribers in two consecutive quarters.

So what’s next?

Netflix announced that it will bring in ads to keep up the game.

But first, what exactly is Netflix trying to do on the revenue side?

Current Netflix revenue stream = Subscription Price * Number of users

To increase revenue, either increase the number of users or raise the price. But raising the price will result in user churn and there’s a limit to how much Netflix can raise the price without hurting the revenue due to user churn

So, increasing users is the only option. And where’s the opportunity?

1. Users binging on another member’s credentials

2. Potential users left out because of the high price

So, clearly lowering price will increase the accessible market. And here’s where they bring in the advertisement business

Revenue = No. of Ad impressions & Clicks + Subscription Price * Number of users

So, basically, there’s a new revenue stream and thus the price can be lowered to draw in more users.

Interestingly the ad revenue aligns with Netflix’s NSM of watch time. More watch time will increase ad impressions and clicks

But then what’s the edge over traditional TV commercials?

1.Quantifiable – The ad partners will be able to measure the ROI of running ads on Netflix just like on YouTube

2. Targeting user group – Netflix already have data on the psychological profile of users which allows for effectively targeting ads

So, what’s the edge over YouTube or other internet-based ad channels?

It all depends primarily on how much time users spend on these platforms/ apps, the natural purpose of the platform plus a lot of other things.