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There are also signs of breaking a taboo: the streaming market leader is working on a cheaper ad-supported version.
For Netflix, it was the first quarter of subscriber loss in more than a decade. The end result was that around 200,000 paid subscriptions were lost in the three months to the end of March. One of the reasons for this was the business interruption in Russia after the invasion of Ukraine, which meant that 700,000 customers were lost in one go. But even with the growth of 500,000 subscribers, Netflix would have fallen well short of its own forecast of 2.5 million. Worse still: for the current quarter, the service expects the loss of around two million customers. Netflix has new episodes of hit series like “Stranger Things” and top-tier movies like “The Gray Man” with Hollywood star Ryan Gosling at the start of solid productions.
Overall, the number of clients worldwide fell to 221.6 million at the end of the quarter. How did that happen? The direction of founder and co-director Reed Hastings referred to “factors beyond our control” such as the slower rise in the proportion of smart TVs with Internet connections, Russia’s war in Ukraine and inflation.
Above all, Netflix is a thorn in the side of customers who share their login details with others. The service estimates that more than 100 million households are free users. When growth was still high, people turned a blind eye, Hastings said. But now Netflix no longer wants to sit idly by.
“For example, if you have a sister who lives in another city and you want to share her Netflix subscription with her, great. We’re not trying to stop that,” said product manager Greg Peters. “But we will ask them to pay a little more for it.” For example, Netflix may use IP addresses to determine where users are accessing the service from. Peters said it could be a year before the system is up and running and used around the world.
At the beginning of the corona pandemic, Netflix was still considered one of the big winners of the crisis, with an increase in the number of customers of 37 million in 2020 alone. But now the momentum is said to have clouded the view.
As a pioneer, Netflix was initially able to gain almost unhindered ground in the streaming video business. But in the meantime, there is increasing competition, including from Disney, Amazon, Apple and Warner’s HBO Max. A few years ago, Hastings, with a touch of arrogance, called the online game “Fortnite” as the fiercest competitor, now he admits that the competition “released very good movies and series”.
Industry watchers also see a problem with Netflix’s strategy of swamping the show with an avalanche of content, sometimes sacrificing quality. A rival like Disney, on the other hand, relies on a few elaborately produced series based on popular characters from the “Star Wars” and Marvel worlds, binding customers for a longer period of time with one episode per week.
To restart growth, Netflix is even willing to shake one of its biggest taboos and introduce a cheaper subscription with interspersed commercials. Netflix has never seen anything like it: Hastings hasn’t given it much thought. While he’s still a fan of subscription simplicity, “I’m even more of a fan of giving consumers choice,” he said. Netflix is already open to the advertising model. “We’re looking at it and trying to figure it out in a year or two.” Details like advertising personalization can also be left to others.
The last time Netflix had a quarter of declining subscribers was in October 2011. Despite the decline, Netflix remains far ahead of its competition. For comparison: Big rival Disney+ had almost 130 million customers at the end of 2021. But Netflix also had to cut profits last quarter. The surplus fell from a year earlier by about 6 percent to $1.6 billion (€1.5 billion). Although sales rose about ten percent to $7.9 billion, they still fell short of analyst expectations. Netflix shares have already fallen more than 40 percent since the beginning of the year. The quarterly report also affected prices from other streaming providers.
Shareholders turn their backs on Netflix after customers drop
After a historic drop in subscribers, Netflix shares suffered heavy losses on Wednesday. In NASDAQ trading, shares of Netflix were temporarily down 35.66 percent at $224.29.
Pundits are already asking about the end of the streaming boom and have drastically corrected their price targets.
“Is the streaming party over?” ask analysts at British investment bank Barclays. The “clutter” of new content from the many streaming services is becoming more and more of an issue. “There are more and more signs that Netflix’s business model is fully mature,” said expert Ross Sandler. This raises questions about how big of a market can still be addressed and whether margins can be held steady.
Including the expected price drop on Wednesday, Netflix’s stock losses total nearly 60 percent. Netflix is now worth just $112 billion on the stock market. For comparison, the November record of over $700 was over $300 billion.
“Netflix disappointment, next” was the verdict of analyst Jürgen Molnar, capital market strategist at Robomarkets. The streaming provider is now even assuming that the decline in customers will continue, Molnar wrote. Netflix appears to have lost its status as the “undisputed number one streaming provider” in the eyes of investors.
Consequently, price targets fell among analysts. Even beyond the unique effect of Russia, Netflix faces tough times, Evercore’s Mark Mahaney wrote. Netflix’s older markets, such as the US and Europe, are saturated, while growth in Asia Pacific is proving difficult. Mahaney slashed the price target from $525 to $300.
Other analysts responded with downgrades in the course of sharply lowered price targets on Wednesday, with UBS expert John Hodulik giving up his previous buy recommendation and JPMorgan colleague Douglas Anmuth downgrading the stock from “overweight” to “neutral.” “. The first quarter and the outlook for the second fell short of expectations, analyst John Hodulik at major Swiss bank UBS wrote in a study. The business model is currently being tested. He expects increased competition, economic headwinds and market saturation to weigh on subscriber growth for now. With that in mind, he lowered the price target from $575 to $355.
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