Netflix Inc. is breaking all of its old rules as it loses customers for the first time in a decade.
In the coming years, the streaming leader will introduce a cheaper, ad-supported option for subscribers, and will begin to crack down on people who share their passwords even before that. In response to the customer losses, Netflix will also reduce its spending on films and television shows.
Reed Hastings, the co-founder of Netflix, has stated for years that he does not want to offer to advertise and has no objections to password sharing. However, the company is changing course after losing 200,000 customers in the first quarter, the first time since 2011. Netflix also predicted that it would lose another 2 million customers in the current second quarter, a significant setback for a company that had previously grown by 25 million subscribers or more per year.
“It’s just shocking,” said MoffettNathanson LLC analyst Michael Nathanson. “Everything they’ve tried to persuade me of over the last five years was abandoned in the first quarter.” It’s such a 180-degree turn.”
Investors, analysts, and Hollywood executives had expected Netflix to have a slow start to the year, but Wall Street still expected the company to add 2.5 million customers in the first quarter. The stock, which had already dropped more than 40% this year, fell as much as 27% to $256 in after-hours trading.
Hastings and co-CEO Ted Sarandos had previously dismissed the company’s slowing subscriber sign-ups as a blip caused by the pandemic, which had accelerated Netflix’s growth in 2020. However, the company’s growth has not recovered to pre-pandemic levels.
Four Factors
Management attributed the problem to four factors, including the prevalence of password sharing and increased competition. In addition to its 221.6 million subscribers, the company claims that more than 100 million households use its service but do not pay for it. The Los Gatos, California-based company is experimenting with new ways to sign up those viewers, such as charging people who share someone else’s account a higher fee.
“It allows us to bring in revenue for everyone who is viewing for gets value from the entertainment we’re offering,” Chief Operating Officer Greg Peters said in an interview with JPMorgan Chase & Co. analyst Doug Anmuth.
Netflix’s problems should serve as a wake-up call to its peers and competitors. After witnessing millions of customers abandon pay-TV in favor of streaming, US entertainment conglomerates merged and restructured to compete with Netflix. Investors backed this strategic shift, boosting the stock of companies such as Walt Disney Co. that demonstrated a commitment to streaming.
Investors are beginning to wonder if some of these media companies will be able to sign up enough customers to justify all of the money they are spending on new programming. In extended trading, Disney fell as much as 5.2 percent after Netflix reported its outlook, while Warner Bros. Discovery Inc., the owner of HBO Max, fell as much as 2.8 percent. Roku Inc., a maker of streaming set-top boxes, saw its stock drop as much as 8.3 percent.
All of these competitors currently provide advertising-supported services or plan to do so in the near future. Analysts and competitors speculated for years that Netflix would offer to advertise, only to be rejected by Hastings. Netflix has always claimed that its subscribers preferred its service to cable TV because there were no advertisements. Hastings also did not want to compete with Google and Facebook in the online advertising market. Nonetheless, he has finally given in.
‘It makes sense.’
“It makes a lot of sense to allow consumers who want lower prices and are ad tolerant,” Hastings said on Tuesday. Over the next few years, Netflix will investigate the best way to offer to advertise.
Password sharing is a risk for a company that began by offering customers a cheaper, more convenient alternative to cable. Netflix begins to resemble what it replaced by nudging customers to pay and inserting advertising.
However, the company requires assistance after losing customers in three of its four regions in the first quarter, including over 600,000 in the United States and Canada. Netflix attributed the majority of the decrease to a price increase and stated that the drop was expected. Russia’s invasion of Ukraine cost the company an additional 700,000 customers when it was forced to discontinue service in Russia, resulting in a loss of 300,000 customers in Europe, the Middle East, and Africa.
Overall, Netflix predicted a 2.5 million increase in subscribers in the first quarter, roughly in line with Wall Street estimates. Analysts predicted 2.43 million in gains for the current period. Revenue increased 9.8 percent to $7.87 billion in the first quarter, falling short of analysts’ expectations. Profit, at $3.53 per share, easily outpaced expectations of $2.91.
There is no explanation.
Nathanson stated, “They were never able to explain why or how growth was slowing.” “They’ve now decided that growth is slowing. “How has this changed in the last two quarters?”
Asia stood out as the lone bright spot. Netflix gained over 1 million new subscribers in the region, boosted by popular new titles such as the South Korean drama “All of Us Are Dead.”
Netflix continues to outperform most of its competitors outside of the United States, and it is the world’s largest streaming service. The company believes it can get out of its current situation by attracting new customers with better programs and finding new ways to charge its existing user base. The company still expects to gain customers this year, and the back half of the year will feature a more robust slate of new shows.
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