Q: What's Ampere’s take on the Netflix financials - is this a good set of results?

It's a very good set of results for the streamer. Quarterly adds were up on the comparable period in 2022 - it added nearly 9m new subscribers globally in Q3 2023 relative to 2.4m in Q3 2022. In fact, in terms of net subscriber additions, it's actually the strongest Q3 for Netflix ever. Performance was strong in mature markets as well as in less-saturated territories. Netflix added 1.8m new subscribers in North America and nearly 4m in Europe. And subscriber growth was also coupled with ARPU growth across almost all regions - we saw a 2% growth in ARPU quarter-on-quarter in North America, 3% in LatAm, and 1% in EMEA. 

Operating income margins for the group are also holding steady, at 22% - and free cash flow is up significantly (albeit this will be influenced heavily by the Hollywood strikes, which have resulted in Netflix - at least temporarily - cutting its cash outlay on new content).

All-in-all, it's an extremely strong set of results for Netflix - and will give the wider streaming market some hope that the recent market slowdowns can be overcome.

Q: What has driven the renewed growth? Why has Netflix seen this return to a positive net addition trend?

The biggest driver for this is the ongoing impact of the account-sharing countermeasures. While the new policy was largely rolled out in Q2, with an immediate effect on subscriber additions, our subscription tracking systems have also shown a sustained uplift in gross additions over subsequent months - which is the key reason why Q3 results were very positive. Netflix has also managed to keep churn contained, despite effectively increasing prices for many of those sharing & borrowing accounts.

Of course the only way that Netflix has been able to implement this strategy is by virtue of having one of the strongest content slates on the market. Over the last year, Netflix has added roughly 700 new Original titles alone to its library, complemented by an array of acquired titles – some of which, like Suits – have serious longevity. The risk going forwards of course is that of the effects of the Hollywood strikes on content releases. 

To-date, Netflix's content release strategy has been minimally impacted thanks to a lengthy pipeline. However towards the end of this year, and early next, subscribers will begin to notice the effects of the strikes on new content debuts. But Netflix has both a diversified subscriber base - with two-thirds of subscribers outside North America - and a diversified production base, with plenty of non-US content in the pipeline. Both of these will help to mitigate some of the worst impacts on its performance.

Q: How significant is the ad-supported tier to this growth? Netflix notes that 30% of new sign-ups are to the ad-tier in markets in which it is available?

Currently, not hugely significant. It's an important facet of Netflix's forward strategy, but the proportion of its subscriber base which are on the ad-tier right now is still in low single digits. To put another way, if we take a look at the US, our calculations suggest that subscribers adding additional accounts to share with friends and family were just as significant a contributor to ARPU in Q3 as the ad-tier was. 

However, this will change. One of the big adjustments to packaging strategy which Netflix has made in recent periods is the removal of the ad-free basic tier. This is a key reason that 30% of new sign-ups are now taking the ad-supported product. Prior to its removal, the 'standard with ads' package was far more unpopular than any of the other tiers, and represented just 10%-15% of Netflix's gross additions, by our estimates. 

With further adjustments to package pricing across key markets - starting with the US, UK and France - we would expect to see new subscribers increasingly looking to the cheaper ad-supported tier. This will obviously take time to wash through Netflix's subscriber base, so we would see this is a slow-burn strategy rather than something - like the account-sharing measures - which will have immediate obvious effects on the company's financials.