Why Netflix Feels the Need to Add Advertising: Q2 Preview

Netflix may still be a leader in original content, but with blockbusters landing on competitor platforms, its price hikes land in a weaker consumer environment. As a result, Netflix is now developing a less expensive ad-supported tier of service.

Here is why Netflix is rethinking its revenue model.

Cancellations continue to outpace signups

Since posting its first loss of subscribers in 10 years, the streaming giant’s cancellation rate (segment data based on NFLX’s subdomain web traffic is a key indicator of cancellations) continued to increase with more than 1.7M cancellations in April. But, cancellations trended down the rest of the quarter with 1.6M in May and 1.3M in June. This may be in correlation to the season 4 release of Stranger Things in May.

Meanwhile, the company is trying to finesse tighter control over password sharing without annoying users enough to further boost cancellations.

Traffic share declining

Over the last 3 years, Netflix has lost almost 25% of its traffic share, according to Similarweb estimates of desktop and mobile web traffic.

No immediate relief

Even if Netflix’s ad-supported business model proves successful, it won’t provide a boost to the company’s financials within the next few quarters. Many details remain to be worked out, including licensing of content from studios originally obtained on ad-free terms.

However, it’s easy to see why management no longer thinks subscription revenue alone is sufficient.

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