What went wrong on Netflix? The media lit up this week with stories that the streaming giant’s seemingly unstoppable growth seems to have come to an unexpected standstill, reporting on Tuesday that, for the first time in more than a decade, it had lost subscribers. The news sent shares tumbling 35 percent on Wednesday morning, marking a €50 billion drop in the value of the company, which had already fallen significantly over the past 12 months.
Globally, a drop of 200,000 in a subscriber base of 222 million might not seem too dire. After all, Netflix can point to its withdrawal from Russia following the Ukraine invasion, which it says cost it 700,000 subscribers. But 600,000 people canceled their subscriptions in the US and Canada after prices went up in January. And an additional drop of two million projected for the next few months looks worrying.
Netflix says its recent price increases will make more money for the company, despite the cancellations. But there is a widespread belief that the rising cost of subscriptions to multiple streaming services is meeting resistance from consumers at a time when the cost of living is soaring. When looking to lower your monthly bills, the easiest place to start is to reach for your phone and opt out of some of your digital subscribers.
no more space
In some markets, Netflix’s problem may simply be that it doesn’t have any more room to grow. In the US and Canada, half of all households already have a subscription, and an additional 20 percent rely on a shared account. That’s 70 percent of all houses, leaving little room for further expansion.
What can Netflix do? Their first target will be the extraordinary number of households around the world (100 million) that use shared passwords to access their content without paying for the privilege. Until now, the company has tended not to make much effort to eradicate these practices, presumably because it saw freeloaders as potential future paying customers. Now it seems to be ready to pay those chips. “That’s over 100 million households already choosing to watch Netflix,” CEO Reed Hastings told shareholders this week. “We just have to get paid at some point for them.”
Netflix is already experimenting in some Latin American countries with a low-cost add-on that allows people to share their account with two other households. But the question remains whether even a lower price threshold will be too high for many users.
Another solution may lie in the example given by platforms, such as Spotify, of a cheaper option with ads for those reluctant to pay full price. In fact, Hastings has confirmed that Netflix is considering launching an ad-supported service. “Those who have followed Netflix know that I have been against the complexity of advertising and I am a big fan of the simplicity of subscription,” she said. “But as much of a fan of that as I am, I’m a bigger fan of consumer choice.”
Market saturation and heightened price sensitivity are indicators of a company transitioning from its early days as an innovative disruptor to a quieter phase of consolidation.
As the leader of the streaming TV revolution, Netflix enjoys first-mover advantage and a level of name recognition that continues to be the envy of its rivals. But those rivals are multiplying and the market becomes more competitive every day. The phenomenon of people switching from one service to another every month, depending on which has the hottest new titles, is likely to increase, and in turn will likely lead to services trying to secure subscribers for longer periods of time.
an extraordinary boom
None of this should have an immediate impact on what actually appears on our screens, but in the longer term it is likely to resurface old questions about the sustainability of the streaming services business model. For a decade now, there has been an extraordinary boom in film and television production around the world, fueled by demand for original content from Netflix, Amazon, Disney, Apple, Hulu, HBO Max and others. That, in turn, has seen employment rise everywhere, including here in Ireland, where studios in Wicklow, Limerick and Belfast have been kept busy despite the pandemic.
Some critics have argued for years that this is all a bubble, fueled by tech industry venture capital and driven by a perceived need to grab as much of the new market as possible. This content boom, they argued, was destined to end in tears.
We will see. But what this week’s events suggest is that a tipping point of sorts has been reached, and the years of breakneck expansion may be coming to an end. “What worked up to this point may not work anymore,” media analyst Michael Nathanson told CNN Business this week. “The world has changed.”