Netflix Gains 1.75 Million Subscribers, Axes DVD-Rental Business

Netflix added 1.75 million subscribers in the first quarter and ended the period with 232.5 million customers, a far slower pace of growth than it was accustomed to before and during the pandemic. After losing subscribers for the first time in a decade a year ago, the company took a series of steps to expand its customer base, including launching an ad-supported tier of service and starting to limit password sharing.

The strategic changes highlight the streamer’s ongoing transition from an upstart that shipped discs in red envelopes to a global entertainment giant focused on increasing its profitability.

The quarter was the first under new co-Chief Executives Greg Peters and Ted Sarandos, after co-founder and former co-CEO Reed Hastings stepped down in January to become executive chairman.

Net profit fell 18% to $1.31 billion in the quarter, while revenue rose 3.7% to $8.16 billion, shy of Netflix’s 4% projection. Netflix shares were roughly flat in after-hours trading.

The company has said that getting every Netflix user to pay—either by forcing people who use other people’s accounts to sign up for their own or having account owners pay extra to share it with people outside their household—could generate an important source of new revenue. More than 100 million people watch Netflix using borrowed accounts, Netflix said.

“This is an important transition for us," Mr. Peters said of the effort on a call for shareholders. He said he expected heavy users who aren’t currently paying for Netflix to sign up as a result of the move. The people who end up getting cut off, on the other hand, represent a pool of potential new customers for Netflix to try to win over in time, he said.

Netflix’s crackdown on password sharing has moved more slowly than many investors and analysts expected. It said the benefits from that push are now likely to materialize in the third quarter, rather than the second.

In Canada, which the company said is a good proxy for the U.S., Netflix said its paid membership base is now larger than it was before it rolled out the paid-sharing changes.

Netflix’s ad-supported tier of service, meanwhile, hasn’t cannibalized the company’s premium ad-free plan: There has been little switching from the premium tier to the lower-cost ad-supported option. The average revenue per member it makes from its ad-backed plan is higher than that of its standard $15.49-a-month ad-free plan, Netflix said.

The company plans to improve the video quality of its $6.99-a-month ad-supported tier of service this month and allow it to be simultaneously used on two devices instead of one, moves the company said would make the tier more appealing to new and existing customers.

Mr. Peters said Netflix needs to build out new features for advertisers and improve its sales capabilities to continue increasing the ad business.

The ad-supported tier of service, which was launched in November, accounted for 1.7% of U.S. subscribers in March, up from 0.8% in December, according data from subscription analytics firm Antenna. Netflix doesn’t disclose the number of subscribers on its ad-supported tier of service.

Netflix raised its estimate for how much free cash flow it expects to generate to more than $3.5 billion this year from an earlier projection of $3 billion.

The company’s operating margin fell to 21% from 25.1% in the first quarter of 2022, though it came in higher than the 20% Netflix projected.

Netflix and its rivals are now more intensely focused on profitability than subscriber acquisition. Customers are increasingly able and willing to jump between services, and they have more options now than ever before from mainstream services to niche platforms.

The company earlier this year cut prices in dozens of countries as it responds to competitive pressure around the world and tries to continue to bring in new customers. Netflix’s average revenue per user declined in Europe, the Middle East and Africa for the fourth consecutive quarter, and fell in the Asia Pacific region for the sixth consecutive quarter.

Netflix Chief Financial Officer Spencer Neumann said those price cuts accounted for less than 5% of the company’s revenue and that the company expects to benefit from the move over the long term.

Mr. Sarandos said the rate of content spending growth at Netflix depends on the rate of revenue growth. He said the company has to keep up its pace of producing hit shows and films, highlighting popular content during the quarter—from romantic comedy “Your Place Or Mine" to drama “The Night Agent" and South Korean TV series “The Glory."

The company also addressed a stumble earlier in the week during its second live-streaming event. Mr. Peters said a glitch in Sunday’s live stream of the “Love Is Blind" cast reunion was caused by a bug that was introduced when the company made changes to improve its live-streaming performance.

Mr. Sarandos also said that while the company wants to avoid a potential writers strike and is negotiating, it has a strong lineup of releases that it expects to help it weather any interruption.

Earlier Tuesday, Netflix said in a blog post that it would ship its last DVDs in September, ending 25 years of mailing shows and movies to subscribers.

Netflix built its business on dispatching DVDs, and for years the company’s streaming platform was more of a side business. But as the company pushed further into original programming and built a bigger streaming library, a growing subset of its subscribers opted to watch content that way rather than order discs to their mailboxes. “House of Cards," which was released in 2013 and became Netflix’s first original program, wasn’t initially available on DVD.

Netflix said it shipped more than 5.2 billion discs over the life of the business. The first red envelope the company mailed in March 1998 contained “Beetlejuice," and the most popular DVD rented by mail was “The Blind Side," a 2009 sports drama featuring Sandra Bullock.

Mailed DVDs “paved the way for the shift to streaming," Mr. Sarandos said in the blog. “Our goal has always been to provide the best service for our members but as the business continues to shrink that’s going to become increasingly difficult." The company plans to wind down its DVD.com website later this year.