Netflix rocked by subscriber loss, may offer cheaper ad-supported plans

Netflix Inc said inflation,
the war in Ukraine and fierce competition contributed to a loss
of subscribers for the first time in more than a decade and
predicted deeper losses ahead, marking an abrupt shift in
fortune for a streaming company that thrived during the
pandemic.

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The company said it lost 200,000 subscribers in its first
quarter, falling well short of its forecast of adding 2.5
million subscribers. Suspending service in Russia after the
Ukraine invasion took a toll, resulting in the loss of 700,000
members.

Wall Street sent Netflix’s stock tumbling 26% after the bellon Tuesday and erased about $40 billion of its stock market
value. Since it warned in January of weak subscriber growth, the
company has lost nearly half of its value.

The lagging subscriber growth is prompting Netflix to
contemplate offering a lower-priced version of the service with
advertising, citing the success of similar offerings from rivals
HBO Max and Disney+.

“Those who have followed Netflix know that I’ve been against
the complexity of advertising, and a big fan of the simplicity
of subscription,” said Netflix CEO Reed Hastings. “But, as much
as I’m a fan of that, I’m a bigger fan of consumer choice.”

Netflix offered a gloomy prediction for the spring quarter,
forecasting it would lose 2 million subscribers, despite the
return of such hotly anticipated series as “Stranger Things” and
“Ozark” and the debut of the film “The Grey Man,” starring Chris
Evans and Ryan Gosling. Wall Street targeted 227 million for the
second quarter, according to Refinitiv data.

The downdraft caught other video streaming-related stocks,
with Roku dropping over 6%, Walt Disney falling
5% and Warner Bros Discovery down 3.5%.

Hastings told investors that the pandemic had “created a lot
of noise,” making it difficult for the company to interpret the
surge and ebb of its subscription business over the last two
years. Now, it appears the culprit is a combination of
competition and the number of accounts sharing passwords, making
it harder to grow.

“When we were growing fast, it wasn’t a high priority to
work on,” Hastings said of account-sharing in remarks during
Netflix’s investor video. “And now we’re working super hard on
it.”

CONFLUENCE OF EVENTS

Netflix’s first-quarter revenue grew 10% to $7.87 billion,
slightly below Wall Street’s forecasts. It reported per-share
net earnings of $3.53, beating the Wall Street consensus of
$2.89.

While the company remains bullish on the future of
streaming, it blamed its slowing growth on a number of factors,
such as the rate at which consumers adopt on-demand services, a
growing number of competitors and a sluggish economy.

Account-sharing is a longstanding practice, though Netflix
is exploring ways to derive revenue from the 100 million
households watching Netflix through shared accounts, including
30 million in the United States and Canada.

This confluence of factors resulted in Netflix reporting
losing customers for the first time since October 2011, catching
Wall Street by surprise.

“They suffered from a combination of approaching saturation,
inflation, higher pricing, the war in Ukraine and competition,”
said Wedbush analyst Michael Pachter. “I don’t think any of us
expected that all to happen at once.”

The world’s dominant streaming service was expected to
report slowing growth, amid intense competition from established
rivals like Amazon.com, traditional media companies
such as the Walt Disney and the newly formed Warner Bros
Discovery and cash-flush newcomers like Apple Inc.

Streaming services spent $50 billion on new content last
year, in a bid to attract or retain subscribers, according to
researcher Ampere Analysis. That’s a 50% increase from 2019,
when many of the newer streaming services launched, signaling
the quick escalation of the so-called “streaming wars.”

Netflix noted that despite the intensifying competition, its
share of TV viewing in the United States has held steady
according to Nielsen, a mark of subscriber satisfaction and
retention.

As growth slows in mature markets like the United States,
Netflix is increasingly focused on other parts of the world and
investing in local-language content.

“While hundreds of millions of homes pay for Netflix, well
over half of the world’s broadband homes don’t yet —
representing huge future growth potential,” the company said in
a statement.

Benchmark analyst Matthew Harrigan warned that the uncertain
global economy “is apt to emerge as an albatross” for member
growth and Netflix’s ability to continue raising prices as
competition intensifies.

Streaming services are not the only form of entertainment
vying for consumers’ time. The latest Digital Media Trends
survey from Deloitte, released in late March, revealed that
Generation Z, those consumers ages 14 to 25, spend more time
playing games than watching movies or television series at home,
or even listening to music.

The majority of Gen Z and Millennial consumers polled said
they spend more time watching user-created videos like those on
TikTok and YouTube than watching films or shows on a streaming
service.

One market observer said Netflix’s stock has benefited from
expectations of perpetual growth.

“Today’s report shows that there is a limit to that
long-term bullish thesis,” said David Keller, chief market
strategist at StockCharts.com.