Netflix’s recent earnings report revealed that the streaming giant’s customer base fell by 200,000 subscribers globally during the period from January to March. The company’s share price tumbled after its announcement of subscriber loss. Its share price slid more than 35% in early trading on April 20, wiping around $55 billion off its value. The streaming platform is expected to lose a further 2 million subscribers over the next three months, falling well short of its forecast of adding 2.5 million subscribers.
The fact that a drop of only 200,000 subscribers from a total of 220 million subscribers led to a share price crash of 35% and instilled fear across the streaming sector seems shocking. But, one must remember that a platform like Netflix needs and thrives on subscriptions. It is a pureplay streaming video on demand (SVOD) service. They focus on a single product and delivery method—subscription television. In their 2021 annual report, Netflix noted that 99.4% of all its revenues came from subscription fees. Unlike Netflix, almost all of its competitors have some other aspect to their business. But for Netflix, all of the eggs are in the same basket.
The drop in numbers is in part due to Netflix’s decision to withdraw from Russia to protest the war against Ukraine, resulting in a loss of 700,000 subscribers. Let us look at other major reasons behind Netflix’s huge shrink of subscribers.
A recent study by Nielsen Corp. found the list of shows on TV and streaming services in the U.S tops 817,000 up from 646,000 in December 2019. Referring to the robust competition from other players, the company noted, “Over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched.” With the launches of Disney+ in 2019 and HBO Max in 2020, US-based entertainment companies have stepped into streaming.
Every major studio that launches a platform means less content for Netflix to distribute as these studios remove their content from Netflix. The Netflix license for Friends—which was once Netflix’s top watched show, was not renewed by rights holder Warner Brothers Television in 2020. That is why, Friends is disappearing from Netflix markets around the world and instead streaming on Warner Brothers’ Discovery platform, HBO Max.
Apart from global streaming giants, Netflix is also competing for attention with local SVOD services such as Stan in Australia and Blim in Mexico. These services have deeper ingrained relationships with audiences which are hard to compete with. The challenge for Netflix is not just the growing number of rivals but also their improving quality. For instance, the relatively new streaming platform Apple TV+ won an Oscar for best feature.
Netflix estimates that 100 million households watch the service for free using shared passwords. Co-CEO Reed Hastings previously described the practice as “ something you have to learn to live with”. Netflix even built this practice into its pricing structure with tiers of membership that allow for more devices streaming simultaneously.
But now, it has started to experiment with stricter controls. In trials in some South American countries, Netflix has started to ask subscribers to pay a small additional fee, about $3 per month, if they share their service with people outside their household.
Netflix has been increasing its monthly fees sharply around the world. Some UK subscribers are now paying a third more than they were less than two years ago for the same service.
Netflix said the price rises would yield more money for the firm, despite the cancelling. But, according to analysts, the rising cost of streaming is wearing on households as the cost of living rises.
The binge-watching model of Netflix has been a point of debate in Hollywood. Even when most of Netflix’s competitors have stuck to the traditional model of releasing new episodes every week, or in batches, Netflix has stuck with its binge model. The company believes that its customers prefer the flexibility of watching every episode when they want.
But, the problem with this binge-model is fading of interest and engagement. Weekly releases help companies keep a customer engaged with a story of character for a long period of time. On the other hand, Netflix’s binge-worthy popular shows tend to fade in popularity after just a few weeks. To remedy this, Netflix has started to release new seasons of some of its biggest shows, like Casa de Papel, in two batches.
Netflix spent $13 billion on content in 2018, with 85% of new spending earmarked for originals. However, Netflix’s revenues are not growing fast enough to cover its rising expenses. As a result of rising content costs, Netflix has been forced to raise its prices. For a user paying a standard price of $13 per month in the U.S, it takes almost four years to pay back that acquisition cost.
The firm’s content strategy causes it to lose more money and grow subscribers at a slower rate. The company’s international content market is also not growing as expected.
Netflix is faced with a deeper question if it needs to redefine its actual product rather than simply tweaking price points and subscription tiers. The company has exclusively focused on a relatively narrow slice of original and licensed film and TV in contrast to its competitors like Amazon, Apple and Disney who have included sports and news as well. The fall in subscribers may be a warning for Netflix to diversity its product and not just play with numbers.