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Has Netflix’s Value Moved Well Beyond Subscriber Growth?
In a shock to Wall Street, Netflix plans to stop reporting quarterly subscriber numbers starting in 2025, believing the metric has lost its relevance in judging the health of a platform.
Netflix’s stock performance has long been linked to subscriber gains or losses.
In a letter to shareholders along with first-quarter earnings, the streamer king sought to reorient investors toward time-spent-viewing metrics where it has more potential upside in the years ahead. Netflix’s decision to prioritize profit, revenue, and free cash flow over subscriber numbers is also made possible by its strong financial performance compared to legacy media companies.
“As we’ve noted in previous letters, we’re focused on revenue and operating margin as our primary financial metrics — and engagement (i.e. time spent) as our best proxy for customer satisfaction. In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential. But now we’re generating very substantial profit and free cash flow (FCF). We are also developing new revenue streams like advertising and our extra member feature, so memberships are just one component of our growth,” the letter said.
The company continued, “In addition, as we’ve evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact.”
On an analyst call, Co-CEO Greg Peters elaborated that with Netflix’s advertising plan, higher engagement is tied to higher revenue per member, as opposed to the fixed per-sub revenue on the plans with no ads. He also noted that under the platform’s paid-sharing initiative, primary account holders are able to add an “extra member” for an incremental monthly fee, but those “extra members” are not counted as separate subscribers.
Netflix is also investing in areas such as live programming, including sports, as well as in video games to drive engagement.
Netflix also won’t be reporting average revenue per member (which it dubs “ARM”) as of Q1 2025.
“We’ve evolved and we’re going to continue to evolve,” said Peters. He added, “That historical simple math that we all did, number of members times the monthly price, is increasingly less accurate in capturing the state of the business.”
Netflix will still announce subscriber “milestones” but nothing on a regular basis.
Netflix announced the change while reporting quarterly results that handily surpassed Wall Street expectations for earnings, sales, and subscriber growth. Continuing to benefit from its move to police password sharing, subscribers grew by 9.33 million in the period, reaching 270 million globally. The outperformance also reflects a strong response to new ad-supported streaming plans, which now account for 40% of all sign-ups.
Still, shares of Netflix dropped 9.1% on Friday on fears that the move to end reporting quarterly subscription totals was a signal of slower growth in the coming quarters. Other technology giants, such as Facebook parent Meta and X, formerly Twitter, stopped reporting monthly active user numbers as growth slowed.
“While still early, the potential concern is subscriber growth had significantly decelerated in 2022 (prior to the implementation of Netflix’s password sharing crackdown]),” Bank of America analyst Jessica Reif Ehrlich wrote in a note to clients. “This could be a harbinger of decelerating subscriber growth in the future.”
Among competitors, Disney, Warner Bros. Discovery, and Paramount Global have all reported weak subscriber growth recently. Apple and Amazon have never offered quarterly subscriber information for their streaming services.
Estimates of Amazon Prime’s growth are still often used to measure Amazon’s stock valuation. Costco, Spotify, Chewy, Wayfair, Warby Parker, and Stitch Fix are among other firms that count subscriber or active customer growth among key investor metrics.
Discussion Questions
Do you agree that Netflix’s business model has become less reliant on subscriber growth?
Is the subscriber metric likewise less relevant for Amazon, Costco, and other more mature businesses?
Poll
Loading …BrainTrust
Lisa Goller
B2B Content Strategist
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
The core of Netflix’s business is subscribers. Subscribers are where it derives most of its revenue. However, as Netflix has grown it has become more difficult to punch out hefty subscriber growth – although Netflix is currently still adding new members – so it is leaning on other levers such as price increases and advertising to drive up the numbers. My guess is that Netflix now sees scrutiny over the raw numbers as something of a distraction and it doesn’t want its share price to unduly influenced by that metric. That’s fair enough, but it doesn’t mean the metric isn’t important.
Subscriber count is important but simply looking at growth rates is misleading. What you are looking for is profitability and churn. Buying expensive content just to drive subscriber growth is misleading in the long run.
Subscription models are expanding beyond traditional services, with companies like Netflix adding revenue streams through advertising and extra features. Netflix’s business model has evolved beyond just subscriber growth. With strong profits, cash flow, and new revenue streams like advertising and extra member features, it prioritizes engagement as a key metric for customer satisfaction and future success, reducing reliance solely on subscriber numbers.
For more mature businesses like Amazon and Costco, subscriber metrics may be less critical as the business diversifies revenue streams. Both Amazon & Costco focus on factors like customer retention, satisfaction, and engagement, alongside traditional financial metrics, reflecting broader business health.
Taking away any insight will cause Wall Street and other interested parties consternation as it will feel like they have a blind-spot. But Netflix’s rational is reasonable and consistent with how other, mature subscriber based businesses are reporting. As a mature business, subscriber growth will inevitably slow, and this will cause the stock market to irrationally, and negatively react, even if financial results are strong. I wouldn’t be surprised to see other mature companies with subscriber-based metrics consider following suit, but it will depend on whether it’s still an advantage or not for them to report. Ultimately, the metrics that matter most are contained in the financial results the firm delivers – and that will never change.
As Netflix’s business model matures, subscriber growth has become too simplistic and understated a metric to accurately reflect performance. Ad growth and extra members are excluded from this metric.
Time-spent-viewing helps Netflix measure engagement (vs. reach) and this measurement will rise with the addition of live sports and gaming. It will also make Netflix more attractive to brands that want to get in front of viewers’ eyeballs while they’re immersed in captivating content.
A company I once worked for made a similar move. It was liberating to report items that made a real difference in where the organization wanted to go instead of the “expected” metrics each quarter. In this context, the shift seems to make sense for Netflix.
The Netflix business model has expanded and diversified into a much broader base than just subscribers, streaming, and watching movies. There is already tremendous overlap among streaming services, cable companies, networks, digital platforms, Amazon, and soon, possibly, even retail chains like Walmart if they buy or initiate a streaming channel. Db
Netflix has 270 million subscribers globally, and it added about 40 million in the last 12 months, the same number of total subscribers it had ten years ago. Netflix is the leading service in most countries in the world. At some point, management must focus on profit and FCF.
I suspect Netflix’s management has focused properly on the finances for the last several years. The problem is that Wall Street hasn’t adjusted. While the growth numbers are relevant for the newer players, Netflix has been doing this for 17 years. It is time to grow up, right? It always surprises me how little Wall Street understands business dynamics. This life cycle is basic MBA101.
There are so many ways that Netflix can wring more money from subscribers, including TV commerce, which Roku is already pioneering. Netflix has a reputation for staying abreast of a rapidly changing landscape; I trust they’ll continue.
It is true that subscriber metrics aren’t as important now that Netflix is a mature company. Subscriber statistics can also be misleading now that their are different tiers of subscriber plans. As advertising revenues continue to account for a larger share of revenue, Netflix should expand their reporting metrics to include advertising levels. I think subscriber numbers are still a valuable performance metric, but they should probably be reported by tier to provide a more accurate picture of peformance.
Yes Netflix’s model can swing to increasing revenue per subscriber, so that total subscriber counts (churn et al) no longer tell the whole story. But subscriber count is still the key underlying business driver. Each subscriber brings 2 (or more) eyeballs to consume all the other services, and as subscriber count varies, so does the entire business.
This is a natural move for Netflix and one that I applaud. It’s focus on profit and FCF reflects its progression into mainstream business operations and the addition of ‘time-spent-viewing’ or TSV is smart. TSV metrics will launch a whole new era of monetization efforts that will drive new models in the streaming industry.
As Netflix finds alternative revenue streams to what used to be the core business, subscribers, they must get the analysts and investors to recognize their new model. One way to do so, as they have done, is to break free from the expected. If their statements are accurate, it won’t take long for the investment world to realize that subscribers are less important than the overall revenue and growth of the company that comes from all streams of income.
Of course growth is going to slow down. How could that possibly be the kind of shock or surprise that would cause a 9% hit to the stock? Growth curves don’t behave like hockey sticks forever. They flatten out, they mature. This is just proof that growth-based valuations tend to be optimistic, or maybe even wildly optimistic. The subscription model is more complicated and nuanced than it was just a couple of years ago. At Netflix’s level of maturity, this seems like a perfectly reasonable move. It means everybody will have to take a little bit of a deeper dive to pressure test for revenue and profit. That’s healthy for the company and investors alike.
Possibly increase revenue by offering additional services to existing customers, such as gaming subscriptions and limited ads. Therefore, the subscriber growth count becomes less relevant.
There are many variables here. It is hard for me to envision a level where Netflix has completely saturated their potential for new subscribers. This move to “engagement” seems more than a bit disingenuous to me. If I watch one hour a week or one hundred hours a week (at least now) I am still paying the same.
Subscribers numbers are still very relevant. Shame on Netflix for moving away from them.
If Netflix expected subscriber growth to continue strong you can bet the farm they wouldn’t be eliminating this metric from valuation. But there are numerous revenue drivers for them and switching emphasis to one they expect to be more favorable going forward makes sense. Now if only investors will play along …