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Netflix stock pops on Q2 earnings, ad-supported tier expected for 2023

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Yahoo Finance Live anchors discuss second-quarter earnings for Netflix as well as the streaming company’s plans for an ad-supported tier.

Video Transcript

- Speaking of digesting different pieces of news, Netflix shares, they're lighting up the Yahoo Finance platform this morning after the company came out with less-than-brutal earnings on Tuesday evening. The company said it lost fewer subscribers than expected in the second quarter, and the executives there also officially announced the unveiling of a lower-cost ad-supported tier to the platform in 2023.

Here to chat all of this with us this morning is our own tech editor Dan Howley to talk about these numbers. And I thought the market, of course, is greeting this enthusiastically because the expectations were so low. But even the executives at the company said, eh, this was not great.

DAN HOWLEY: No. Yeah, I mean, they lost 970,000 subscribers total. In the US and Canada, they lost 1.3 million alone. So they're adding, obviously, in Latin America and the Asian Pacific area. But in areas where they're already fully built out, they're starting to see people pull back.

And this, it has to do with a number of issues. They point to Ukraine as being an issue and COVID. OK, sure. But the broader issue for them is that they had so many people sign on when COVID was at its peak that they just blew up so fast. And so all of that was pulled forward for the subscribers.

And now people are saying, well, what the hell do I have Netflix for again? I forget, because there's not very many huge hits, especially when you look at something like a Disney, which has those huge IPs. We have everything from Marvel to "Toy Story" to-- I always mention "Toy Story" for some reason-- but Marvel, Star Wars, things along those lines. Paramount+, eh, that's a thing, I guess.

But really, there's so many other options out there that Netflix, outside of something like a "Stranger Things," it's not really putting out those huge behemoth pieces that they might have at one point. So I think that, obviously, has a lot to do with it. I'm looking forward to the ad tier though.

- Yeah?

DAN HOWLEY: I mean, I think it's something that for me personally, I have all of these different subscriptions. Right, I have Netflix. I have Amazon Prime. I have Hulu in my family. I have Spotify that I pay for.

So it's all these different services-- YouTube TV is another one that I have-- that it's just at a certain point, it becomes diminishing returns, right? I did all this to stop paying for a lot of cable. And now I'm just paying more than I might have with cable. So I think an ad-supported tier would be really, really helpful as long as, and I really want to caveat this, they don't screw it up, because if you look at something where you have these ad-supported tiers and it's just nonstop roll of ads, 15 minutes of ads for 30 minutes of content, I'm just going to pay for it, then, because it just kills the experience.

- Only in the alternate universe of investing in Wall Street where you can lose a million humans that subscribe to your platform and the stock is going to go up. And we're seeing a bid put under Roku, all the other streamers. Disney is a hot ticker in our site.

But it was just, I think the Street is giving them high marks because the quarter wasn't as bad as feared. Also they're looking for 1 million new subscribers in the third quarter. Market seems like that, also seems to like what they said about on the conference call about not spending too, too much on original content, so not going full-on crazy developing original content. Market likes hearing that.

But I think these execs at Netflix are living in an alternate universe of their own. They talked at length about how their business may be borderline recession proof. That's not how things work. If you just lost your job, you're cutting Netflix. You're cutting Netflix. You're in your backyard, maybe you're barbecuing some food. You're not on, you're not watching these things.

You're looking for ways to cut. Netflix is not recession proof. And I'm surprised they threw out that tone on that call yesterday. It was absurd.

- Well, that just leans them directly into their ad-supported offering. And that's what they're combating to a recessionary environment, that offering would be, because on the call they did say that it would be an extension of that sort of proconsumer wide range of prices that increases accessibility of the service, especially in the years to come.

And you think about the ad-supported service as well. Another secondary winner in that experience, Microsoft here, too. They're going to be the ones that really have that ability to make sure that in all of the insertion orders and the number of marketing campaigns that can be run, either preroll, midroll, postroll, whatever that experience may look like, that they're the ones that are actually servicing that for the advertisers that are coming to the platform.

- Yeah, a couple of observations on everything we've been saying. First of all, when it comes to blockbusters, I mean, "Stranger Things" is a blockbuster. That counts as a blockbuster, right? 1.3 billion hours they said that people streamed in the first month that "Stranger Things" was out. I guess it's just not consistent blockbusters--

DAN HOWLEY: Right, that's the issue

- --sort of sprinkled through there. I mean, "Squid Games," obviously, a blockbuster. We'll see how "The Gray Man" does. They've been touting that--

- What?

- --the Ryan Gosling, Chris Evans movie, right? I just looked on Rotten Tomatoes. It has 52% on Rotten Tomatoes, which maybe doesn't bode well. But it's on Netflix so people are going to watch it.

I'm going to watch it, even because it's got Ryan Gosling and Chris Evans in it, even if it's not very good, right? I mean, come on. So there are things that draw people into Netflix, and certainly things that perhaps keep people from canceling. Oh, there's enough on there.

The other thing I noticed this morning that's interesting here is in terms of analyst commentary reaction, there seems to be a little bit of a split between Wall Street banks who are a little more positive or less negative and non-Wall Street firms, firms like Pivotal Research Group and Vital Knowledge, which were a little more skeptical. Pivotal Research writing in a note-- and they've got a sell rating on it, by the way-- "The ad-supported tier is likely to not increase subscriber growth in core markets and could actually push down average revenue per user."

Then you have Piper Sandler analyst Thomas Champion on the other side-- and he's going to join us later on-- saying that the average revenue per user from the company's upcoming ad-supported tier may exceed that of subscriptions overall in the long term, that that's a big growth area. So it's interesting the split that you're seeing here.

DAN HOWLEY: I think they'll end up perhaps losing some people, like me, who just don't necessarily want to stay on the entire time. So you have all these--

- Will you get the ad-supported one?

DAN HOWLEY: I would, yeah. I would. And I think that the bigger issue is churn, right, because you have these big names, like "Squid Game"-- I don't want to put that under the bus-- as well as "Stranger Things." And what was it before that, "Tiger King." Was that it?

- Yeah.

DAN HOWLEY: Right, so you have like these big cultural moments. And then you have these just lulls in between, where it's like, I guess I'll watch the same show.

- "Bridgerton."

DAN HOWLEY: Yeah, I mean, yeah, well, that's not my bag. But you look at something like these shows that maybe you've heard of or haven't necessarily wanted to watch before and you're just like, all right, screw it, I'll just throw it on because I have Netflix and whatever. But I also have Hulu. I also have Prime Video. I just got done watching "The Boys," awesome stuff, right?

So I think for me, in those lull areas, I'm going to use the ad tier version. Then maybe when there's a big moment, like a "Stranger Things" or a "Squid Game" or something like that, I'll boost back up so I don't have to sit through the ads. But when I'm just sitting there and it's just background noise, I don't care if ads are on.