Netflix’s first-quarter earnings for 2022 were just disclosed, and they revealed a surprising loss of 200,000 subscribers, a concerning shift for a company that has only seen consistent growth since 2011.
The headline in the New York Times: Netflix loses subscribers for the first time in a decade was intriguing, but there is some complexity to be found. The company lost 700,000 subscribers in the quarter as a result of its departure from Russia in response to Russia’s invasion of Ukraine and subsequent sanctions.
After accounting for the Russian loss, the net outcome was a 500,000-subscriber increase, which fell short of the 2.5 million-subscriber increase projected.
Netflix’s forecast of a further 2 million subscribers lost by the second quarter was even worse in the report.
As a result, Netflix announced content cutbacks, including the cancellation of the Bright sequel and the comic adaptation Bone, as well as possible cutbacks in staff numbers and discretionary expenditures.
So, what caused this drop, and what is Netflix’s next move?
Proliferation Of Platforms
Netflix is facing rising competition from a growing number of streaming competitors, as the company acknowledged in its letter to shareholders.
“Over the last three years, as traditional entertainment businesses realized streaming is the future, many other streaming services have also emerged,” the company said, referring to the fierce rivalry from other competitors.
These US-based entertainment companies have entered the streaming market with the debuts of Disney+ in 2019, HBO Max in 2020, and Paramount+ in 2021. The market is becoming increasingly competitive. Every big studio that establishes a platform implies that Netflix may distribute less material since the major studios withdraw their content from Netflix when they debut.
Friends’ Netflix license, which was formerly one of the most popular series on the service, was not extended by rights owners Warner Brothers Television in 2020. As a result, Friends is no longer available on Netflix in many countries and is instead available on Warner Brothers’ HBO Max platform.
Popular originals have also made advances on global streaming platforms. Audiences have enjoyed Severance on Apple TV+, Halo on Paramount+, and Raised by Wolves on HBO Max. This achievement is undoubtedly prompting customers to adopt a more intelligent approach as they face the realities of hefty monthly expenditures when paying for all services.
Local Subscription Video-on-Demand (SVOD) services, such as Stan in Australia and Blim in Mexico, and regional services, such as Viaplay in Northern Europe and VIU in Asia, are also fighting for viewers’ attention.
These services offer distinctive value in particular markets, and they frequently rely on pre-existing ties in local media ecosystems. Viaplay has a lengthy history as a satellite television network in Sweden, whereas Stan is a joint venture between Nine Network and Viaplay.
Global streaming companies like Netflix are finding it increasingly difficult to compete not only with other global media corporations but also with local and regional services that have deeper rooted ties with viewers.
Why does Netflix need subscriptions?
How can a decrease of 200,000 members from a total of 220 million subscribers cause a 35 percent reduction in the stock price and spread dread throughout the streaming market?
Netflix is a pureplay SVOD provider, making it rather unusual in the market. They only sell one thing and supply it through one method: subscription television. Netflix said in its annual report for 2021 that membership payments accounted for 99.4 percent of all income (a paltry 0.6 percent came from the dying DVD business).
Netflix has been dubbed “a zebra amongst horses” by streaming expert Amanda D Lotz, who describes the company’s connection to rival SVOD providers as “unique in the market.”
Almost every single Netflix rival has a different facet to its operation. Lotz refers to Disney’s SVOD component as a “corporate extension” of the core media company in her 2022 book Netflix and Streaming Video, and Apple TV+ as a “corporate complement” to their technology business in her book Apple TV+.
The SVOD service may help corporations like Disney leverage and cross-subsidize their overall operation. Apple TV+ isn’t under any financial strain because the iPhone is the company’s main growth engine.
However, Netflix has put all of its eggs in one basket. Even minor changes in subscriber numbers, and a negative growth projection, demand a rethinking of their future, especially if they have no alternative revenue streams to compensate for the losses.
That is one of the reasons Netflix has been expanding into new markets, such as visual effects and gaming, with the purchases of Scanline VFX in 2021 and Boss Fight Entertainment in 2022. We might expect a stronger sense of urgency in these deals.
What really is Netflix’s next move?
Netflix is proposing two major changes to reverse the downward subscriber trend: a lower-cost, ad-supported subscription tier and a crackdown on family password sharing.
Neither of these solutions provides a compelling reason to keep your subscription active. There’s no guarantee that popular original programs like Sense8, Altered Carbon, or The OA won’t be canceled soon. Rather than introducing new features or content, Netflix has decided to remove some of the service’s most important elements.
Netflix’s latest subscriber decline might portend a bleak future for the company.