For the first time in a decade, Netflix lost subscribers – 200,000 overall in the first three months of the year – the result of shifting economic forces, increasingly fierce competition from other streaming platforms and the conflict in Ukraine. The announcement, plus the company’s warning that it is expected to lose two million subscribers in the second quarter, sent the stock down about 30 percent in trading Wednesday morning.
In a letter to shareholders, Netflix attributed its subscriber loss to a number of factors, including a slowdown in the adoption of broadband and smart TVs; password sharing among households; and increased competition from both traditional cable and broadcast TV and other emerging streaming services. It also cited macroeconomic factors including increased inflation and Russia’s invasion of Ukraine, which prompted Netflix to shut down its service in Russia, reversing the modest subscriber growth in the European region by a loss of 700,000 Russian accounts.
But a changing landscape in streaming may also be at play.
For years, Netflix was seen as the original disrupter in entertainment. Its emergence in the field prompted every major studio in Hollywood to adopt a streaming strategy to better compete with Netflix’s bingeable, no-advertising revolution. Now with entrants like Disney + and HBO Max sporting their own compelling services, the company may be forced to adopt some of the revenue streams that have made the traditional media companies successful for decades: theatrical distribution, advertising-supported subscription services and perhaps consumer products.
Reed Hastings, the co-chief executive of Netflix who has long dismissed an advertising-supported tier, confirmed Tuesday during a taped interview with investors that his thinking had changed. “Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” he said. But he added, “I’m a bigger fan of consumer choice and allowing consumers who would like to have a lower price and are advertising-tolerant get what they want.”
The about-face signals the company’s recognition that it must differentiate its revenue streams, including venturing into the gaming business. The company this week announced a new animated show and a mobile game around the in-person card game “Exploding Kittens.”
“Netflix, which was traditionally evaluated as a technology stock, is now starting to get valued as more of a traditional content provider,” said Jon Christian, a founder of OnPrem, a technology consulting firm specializing in media and entertainment. “Yet they don’t have some of the advantages that some of the other major streaming providers have, like theatrical box office and sports programming.”
Mr. Christian added that Netflix’s singular focus on subscription acquisition may be its Achilles’ heel.
“Look at Disney,” Mr. Christian said. “It’s not only streaming but they have theatrical, they have theme parks, they have consumer products, they have ways to diversify, which gives them flexibility.” He added, “Netflix is going to have to start looking at other things like that to diversify their revenue.”
Also plaguing the service, analysts say, is a lack of must-see content. While Netflix used to be the first stop for consumers, recent offerings like “Severance” from Apple TV, “The Dropout” on Hulu and “The Gilded Age” on HBO Max have prompted consumers to go where the hits are rather than stick with their first streaming subscription.
According to a recent survey from Deloitte, subscriber churn in the United States is at 37 percent, with consumers canceling their services because of cost issues and lack of new content.
To Raj Shah, an analyst at the digital consultancy firm Publicis Sapient, this behavior was not surprising. “One-off hits like ‘Bridgerton’ are not enough to keep subscribers hooked,” he said in an email. “It is going to need a string of well-timed, well-liked, must-see programming to attract and hold onto customers.”
In the earnings interview, Ted Sarandos, the other co-chief executive, pointed to the new season of “Stranger Things” and the final installment of “Ozark” as a must-see content along with films like the sequel to “Knives Out” and “The Gray Man,” a new action film from the filmmakers behind “The Avengers,” starring Ryan Gosling.
The company lost 600,000 subscribers in the United States and Canada, which it attributed primarily to its most recent price increase. Asia was the one region that showed growth, with Japan, India and the Philippines among the countries adding subscribers.
The company said it intended to jump-start its revenue growth by improving all of Netflix, specifically “the quality of our programming and recommendations, which is what our members value most.” The company also said it would “double down on story development and creative excellence” and pointed to recent successes, including two shows created by Shonda Rhimes – the second season of “Bridgerton,” which generated 627 million viewed hours, and “Inventing Anna, ”With 512 million viewed hours – as well as the family adventure film,“ The Adam Project, ”starring Ryan Reynolds, which was viewed for 233 million hours.
On the product side, Netflix said the introduction of the “double thumbs up” button, which allows viewers to “express what they truly love,” should help the company improve its personalized recommendations for the consumer.
Netflix is also trying to clamp down on password sharing among households – a worldwide phenomenon that the company believes accounts for 100 million unauthorized users. To combat this, the company started testing solutions in three markets in Latin America, with one option allowing current members to pay for additional households.
The company also acknowledges that much of its future growth will come from outside the United States. Three out of its six most popular TV shows are all non-English language: The South Korean shows “Squid Game” and “All of Us Are Dead,” and season four of the Spanish show “Money Heist.” To support this, Netflix has been building out its international production capabilities and is now producing film and television in more than 50 countries.
The company made 1.6 billion in profit on 7.8 billion in first-quarter sales, a 10 percent increase in revenue compared with the same period last year.
Netflix, with 221.64 million subscribers, still has the largest subscriber base of all the streaming services. But the company’s forecast of a loss of two million subscribers for its second quarter indicates that the slowing growth is likely to continue for the foreseeable future.