The correction has finally come for Netflix. It was inevitable (and predictable) given the company’s outsize position in the market and the current pandemic-accelerated SVOD, or subscription video of demand, glut.
On April 19, the streaming giant reported a loss of 200,000 subscribers for the first quarter. Some of this was attributed to the decision to cut off 700,000 subscribers in Russia due to Russian president Vladimir Putin’s bloody invasion of Ukraine.
More ominous: The company predicted a hemorrhage of 2 million subscribers in the second quarter, citing “growth headwinds” including the high number of subscribers who share their passwords. The last time Netflix lost subscribers was in 2011 when the company was still relying on the U.S. Postal Service to deliver DVDs (remember those?) to customers.
The dire forecast sent Netflix’s stock tumbling more than 35 percent last week, wiping out more than $50 billion in market capitalization (and the value of Netflix employees’ stock options). For perspective, last November, Netflix shares were worth close to $700, this week they are down around $200 a share.
There was some quiet gloating among industry competitors over the comeuppance of a company that threw stunning amounts of cash around Hollywood as it kept actual viewer data locked away from public view.
But it was brief. Because the Netflix headwinds portend a maturing streaming market and stagnant growth. So the Wall Street casino whirred into action, sending the stock price of Disney, Warner Bros. Discovery and Paramount downward. Meanwhile, Facebook parent Meta, Microsoft, Google parent Alphabet, Apple and Amazon are all scheduled to report quarterly results this week. As Big Tech goes, so goes the market; these companies represent more than 20 percent of the S&P 500.
What set Netflix apart during its march to domination was its scale. The first and still biggest streamer gobbled up theatrical releases and reruns of popular TV shows — “Friends,” “The Office,” “Gossip Girl,” “Modern Family” and “The West Wing.”
“Friends” is now on HBO Max, “Modern Family” is on Disney+ and “The Office” is on Peacock.
And these legacy brands have a tradition of making programming; Netflix did not start making its own original content until 2013. And since then, it has thrown so much at the wall, fueling the current content glut. Faced with a plethora of streaming subscription options and feeling the pinch of inflation, consumers are deciding they can live without some of them. The churn rate in the U.S. is 38 percent, according to global consultancy Deloitte, and has remained relatively stagnant. But the company predicts an uptick in subscription cancelations (150 million worldwide) in 2022. (In the U.K., more than 1.5 million people canceled subscriptions to streaming services during the first quarter of 2022, according to market research firm Kantar, with about a third of those canceling citing the impact of cost-of-living increases.)
Netflix still has 219 million subscribers worldwide — most of them in North America (74.5 million) and Europe, the Middle East and Africa (73.7 million), where analysts see little room for growth. And competitors are catching up. Launched in 2019, Disney+ added 11.8 million new subscribers last quarter for a total of 129.8 million. At the time, the company said it was on track to reach as many as 260 million subcribers by 2024. Disney reports second-quarter fiscal earnings on May 11.
All of this is forcing a pivot at Netflix, including belt-tightening at the company known for rich compensation packages and a massive ($17 billion annually) content budget. There is also talk of a foray into gaming and live sports, a segment at which competitor Amazon has thrown billions of dollars with deals for the NFL’s Thursday Night Football and Premiere League soccer.
It remains to be seen if Netflix engineers actually crack down on password sharing, something the company previously laughed up. But Netflix’s development executives are likely doing some soul searching as so many legacy TV and movie hits can no longer cushion homegrown flops; for every “Squid Game” there are 10 “Hollywood” — the forgettable Tinsel Town nostalgia trip from Ryan Murphy, and the first production under Murphy’s whopping $300 million development deal.
But the biggest shift will be Netflix’s grudging adoption of that legacy media revenue staple: advertising. After consistently rejecting a lower-priced ad-supported tier, cofounder and co-chief executive officer Reed Hastings opened the door during the company’s very tough April 19 earnings call.
“Those who have followed Netflix know that I have been against the complexity of advertising, and a big fan of the simplicity of subscription,” Hastings said. “But as much as I am a fan of that, I am a bigger fan of consumer choice. And allowing consumers who would like to have a lower price, and are advertising-tolerant, get what they want, makes a lot of sense.”