Red Notice: Netflix suffers dramatic subscriber losses

May 7, 2022

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3 min read

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What's going on here?

Shares in the streaming giant fell by 40% on the morning of Wednesday 21 April as it reported quarterly subscriber losses for the first time in more than a decade.

What does this mean?

The company revealed that it had lost 200,000 subscribers in the first three months of 2022, shattering Wall Street predictions that it would add 2.5 million subscribers. The cancellations end a decade-long streaming boom since the company last reported losing subscribers in October 2011.

The news prompted the company’s shares to plummet more than 38% during morning trading – a $58bn loss in market value. Now valued at $95bn, Netflix has lost almost two-thirds of its market value since October 2021.

Rival streaming and media providers were also affected. Walt Disney, owner of Disney+, dropped more than 5% and Paramount Global was down by 10%.

What's the big picture effect?

The company cited its withdrawal from Russia, which cost it 700,000 users, and higher subscription prices as reasons for its poor performance. However, the streaming service also warned that it could lose another 2 million subscribers in the current quarter, adding to investors’ fears that we may have reached ‘peak Netflix’.

Firstly, there is the current squeeze on household finances, as surging food and energy prices push inflation to a 30-year high. The Netflix figures come as data from analytics group Kantar showed that UK households had cancelled streaming services cancellations in record numbers in the first quarter. Consumers needing to trim budgets will cut non-essential services – and it is now clear that streaming is one of the first to go.

Another concern is competition. Even Netflix’s CEO, Reed Hastings, has acknowledged that the likes of Disney, Apple and HBO have “some very good films and shows out”. Netflix may well be left behind in the ‘content wars’ as Disney intends to spend $33bn on content this year, compared to Netflix budgeting $19bn.

Finally, the jury is still out on the long-term business case for the Netflix streaming model. Content has a very high decay rateSquid Game is “so last quarter”, as one media analyst put it. Viewers’ insatiable appetite for new content means Netflix has to keep spending, even with 222 million subscribers. This makes for a very capital intensive business model and, in the words of one commentator, a “balance-sheet nightmare”. As well as its yearly content spending, the company has $14.8bn in long-term debt and $23bn in long-term content costs. With such high costs, reduced revenue from subscriptions is a real worry. 

The gloomy figures have prompted a change of strategy. Firstly, a crackdown on password-sharing and the 100 million people who are estimated to share accounts. Secondly, a u-turn on the company’s long-standing opposition to advertising, which analysts think could generate $3bn in extra revenue. And finally, reduced spending on content, which the company announced on Tuesday.

However, the biggest concern for the company is market saturation and suggestions that we have reached ‘peak streaming’. With few remaining potential subscribers in the developed world, Netflix’s growth is likely to hinge on whether it can successfully tap into emerging markets, such as in India and Africa. But questions of affordability and digital payment access are making this difficult. Last December, Netflix was forced to cut its monthly price in India by almost 25% to $6.60, and its mobile-only plan to less than $2. Faltering growth has therefore spooked investors that Netflix has overestimated the size of the streaming markets. Hastings’ assumption that the streaming giant’s addressable market was any household in the world with internet access (1 billion subscribers) is increasingly challenged by sceptical analysts, who think the true figure could be closer to 400 million. The future of Netflix and the streaming industry could well come down to who is right.

Report written by Oliver Hutton

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