Netflix has been dominating the global streaming market for the past decade. The market equations, however, are changing fast as everyone is maturing in the game and is fast catching up now.
This is the most important takeaway from Netflix’s shocking admission on Tuesday afternoon. Instead of achieving the target of adding 2 million new subscribers in Q1 2022 that it set for itself three months earlier, it ended up losing 200,000 subscribers. However, this could just be the tip of the ice burg as Netflix is expecting to lose 2 million more subscribers in the ongoing quarter. The market response was quite obvious; Netflix lost one-fourth of its value as the stock price tanked 25% within a day.
How bad the impact is on the company, investors, and management? This could be well understood from the move that is likely to be made soon. In an earnings call after announcing his company’s results, Co-CEO Reed Hastings surprising everyone by revealing that the company was going to finally embrace an advertising-supported version of the service, which would be cheaper than its current ad-free version. Remember, barely a few months ago Netflix’s CFO Spencer Neumann strongly denied walking the ad-supported path that most of the other OTT players have started following! He tagged Netflix with a ‘superior service’ to justify his decision then.
In the last 10 years, Netflix never lost subscribers. It was 2011 when Netflix lost its subscribers after it made the mistake to do away with a less-profitable DVD-mailing service, and then tried to raise prices simultaneously.
So why is Netflix losing subscribers?
Netflix has been on an incredible run since then. It was able to get into streaming with Hollywood’s help (mostly unwittingly) long before Hollywood realized that streaming would be a mind-boggling business idea capable of churning billions of dollars. However, despite being late to the party, Hollywood finally realized the true potential of streaming, and the market got flooded with hundreds of streaming services in no time, staking up one against another.
For many years, Netflix kept telling investors that almost every competitor – including Disney, Hulu, HBO, Paramount, Peacock, Apple and Amazon – is following footsteps. And, most importantly, they streaming the same content that Netflix used to run, and it’s all fine. But now, Netflix claims that this has become a challenge now as people are ditching Netflix for those streaming services that are available at much more competitive prices.
Netflix keeps believing – and makes investors also believe the same – that it wasn’t a problem as viewers are still spending the highest time with Netflix. In the investor letter, the company includes a chart that shows how Netflix’s share in total TV time in the US has increased over the past year. Alongside, it also shows how much competition Netflix is facing.
In a bid to keep investors convinced and happy, Netflix went blindsided by a crucial fact – the competitors are reducing the pool size of original content that Netflix used to enjoy to pick the content from. That this was a problem having a far-reaching impact that Netflix failed to understand.
Hollywood used to allow Netflix to have a lot of its old TV programs and movies as it believed that hardly anyone would pay for streaming these shows online. After nearly a decade, the same big TV and film companies have realized how wrong they were! Since the awakening, they have taken back streaming rights of a lot of shows that were on Netflix and put them on their own services. “Friends” is now available on HBO Max; The Office can be found on Peacock; all Disney stuff is available on Disney+. As they gained significant market traction they have decided to spread their wings and now all are competing with Netflix to get new projects. Off late, the frequency of great content that could mesmerize the viewers, has become slow on Netflix. Shows that have the capabilities to pull viewers are high in demand and Netflix’s cost, efforts, and challenge to identify and acquire such content have increased multiple folds.
The top bosses at Netflix were quick to realize the challenges ahead and started making moves to iron out all possible concerns investors could have in the future. For example, Netflix began to get into video games a year ago — a sign that Netflix was concerned that its streaming video offerings might not be sufficient to retain and attract customers. After turning a blind eye to widely known password-sharing activity practiced by the majority of its paying subscribers for years, Netflix has decided to crack down on password sharing – something Netflix used to take pride in the past.
Netflix failed to foresee the risk involved in such practice then. It decided to leave the money on the table instead.
So, how catastrophic the problem of losing subscribers is for Netflix in real?
Actually, it’s not much of a concern. In the worst-case scenario, if the estimation of losing another 2 million proves correct, Netflix would still report 219 million subscribers by the end of Q2 2022. By no means that can be labeled as a small figure as it would still be more than any of its rivals.
So, what exactly is the real challenge for Netflix?
Netflix has an edge over its rivals who are burning a gazillion dollars every year in acquiring new subscribers and also borrowing money from Wall Street to finance new movies and shows. All, it needs to do is find the shows that must be appealing enough to keep existing subscribers glued to the platform, and also pull back the lost subscribers. The task, however, is quite difficult than it sounds in an era of the internet and startup revolution where everyone wants to be the boss instead of working/making content for someone else.
