Faced with declining subscribers, Netflix has decided to add a lower-priced, ad-supported membership level to shore up its business. The news didn't help Netflix stock, which crashed on Wednesday after a dismal first-quarter report.
Netflix Chief Executive Reed Hastings announced the move late Tuesday after the company shocked Wall Street by revealing a surprise drop in subscribers in the first quarter.
Netflix is the last major subscription streaming video service to adopt an ad-supported service tier, something it had pooh-poohed for years.
"Those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription," Hastings said on a conference call. "But as much as I'm a fan of that, I'm a bigger fan of consumer choice."
Netflix Stock Tanks After First-Quarter Report
Netflix will offer the ad-supported service in the next year or two, Hastings said. He said Netflix likely will partner with other companies for the ad-serving technology.
On the stock market today, Netflix stock plummeted 35.1% to 226.19. It dropped to its lowest level in more than 4 years.
Investors dumped Netflix stock after the company reported losing 200,000 subscribers in the first quarter. Wall Street and the company's own guidance had predicted 2.5 million new subscribers in the period.
Worse yet, Netflix forecast losing 2 million subscribers in the second quarter. It ended the March quarter with 221.6 million subscribers worldwide.
Needham Applauds Ad Move
Lower-cost, ad-subsidized subscription offerings at rival services have proved that some consumers like that option, Hastings said.
"It's pretty clear that it's working for Hulu. Disney is doing it. HBO did it," Hastings said. "It would be a plan layer. So, if you still want the ad-free option, you'll be able to have that as a consumer. And if you would rather pay a lower price and you're ad-tolerant, we're going to cater to you also."
Needham analyst Laura Martin, who has been leading the call for Netflix to add an ad-supported service tier, upgraded Netflix stock to hold from underperform on Wednesday.
However, she said Netflix is now a "show me" story. It will need to show investors that it can grow its business through advertising and by monetizing nonpaying users who access the service through shared accounts.
Netflix's roughly 222 million global subscribers might turn out to be a peak for the company, given growing competition, Martin said.
Netflix Stock Downgraded
At least 11 Wall Street firms that had buy ratings on Netflix stock downgraded it to neutral or sell after the earnings report.
JPMorgan analyst Doug Anmuth lowered his rating on Netflix stock to neutral from overweight. He also slashed his price target to 300 from 605.
Netflix reported a "sea change quarter" in which the company "essentially conceded to every key point of the bear thesis," Anmuth said in a note to clients.
Monness Crespi Hardt analyst Brian White said Netflix executives weren't their usual chipper selves on their quarterly conference call for investors.
"The tone of the call was dark with Netflix dazed by a flurry of forces hijacking the platform, including a high penetration rate, password sharing, increased competition, negative macro trends, and the suspension of service in Russia," White said in a note to clients. He rates Netflix stock as neutral.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
