When it comes to the media landscape, Netflix has seemed to be an unstoppable giant. However, their quarterly earnings report, which came out this week, shows that Goliath might just have met its David. For the first time in over a decade, the company had a net subscriber loss rather than net subscriber growth. The company has some ideas on why it happened, but the most obvious seems completely missing from the explanation. But, the response to the loss has been swift and severe.
Netflix lost subscribers, more than they said
The headline of the Netflix quarterly earnings was that they lost 200,000 paid subscribers in the first quarter of 2022. That alone is something to focus on, as it is a first for the modern version of Netflix. In the past decade, Netflix had never seen a net subscriber loss - until this quarter. The company says it believes that there is a solid explanation, but the explanation fails to address any of the actual problems.
However, the number given, 200,000, is a bit misleading. Netflix shut off access to paying customers in Russia, accounting for another 700,000 subscribers being cut off from the service. This means that, between voluntary and involuntary losses, the company is down nearly 1 million paid subscribers. This represents a major problem for the company, and the market took notice.
Shortly after the announcement, the company's stock price plummeted. It took a 36% price hit, dropping from $348 to $221 per share. This is the second largest drop in the company's history, but the previous 40.9% record happened when the price was only around $17. This change represented a $50 billion loss in valuation, a massive change in a day.
Why Netflix lost subscribers
The company seems very confident in its reasoning for why they lost subscribers. They claim that "macro factors, including sluggish economic growth, increasing inflation, geopolitical events such as Russia's invasion of Ukraine, and some continued disruption from COVID are likely having an impact as well." Of course, what's happening in Europe had an effect, as they booted 700,000 customers from the platform. Inflation might be having an impact, but not likely a large one, as entertainment is one of the last industries to be affected.
The reality is that Netflix is competing in a very crowded market and they're doing it with questionable and sometimes controversial content. The brand continues to see calls for boycotts over content such as Cuties, a foreign film that opponents say sexualizes very young girls. They've also gotten increasingly political, with Barack Obama hosting a series about National Parks. Add to that shows like He's Expecting and Big Mouth and you're looking at a large portion of the subscriber base looking for alternatives.
But, if you ignore the controversial content, Netflix has another content-related issue: there's simply nothing particularly enticing about the platform these days. Sure, Stranger Things is coming back for its final seasons soon, but is that enough to sustain the brand? And what happens after it finishes? There hasn't been a new series available in a long time that has brough me onto the platform. I find myself spending more time on Hulu, Paramount+, and Prime Video than I do on Netflix.
The company's response
Because Netflix's leadership seems to be ignoring the lack of compelling content on the service, the response has been surprising. First, reports show that they are ending production on the Will Smith-led Bright 2. Even following the Oscar incident, and potentially because of it, Will Smith is always a big draw, in the box office or streaming. So, cutting this film seems counterintuitive.
They've also slashed the animation division. According to another report, the Director of Creative Leadership and Development for Original Animation, Phil Rynda, has been let go from the company. With that departure comes the termination of several animated projects at the company, including the adaptation of comic Bone and Roald Dahl's The Twits.
Netflix paid a large amount of money just 6 months ago for the rights to Roald Dahl's catalog of content by purchasing the company that manages those rights. Dumping one of the existing productions using that already sunk cost seems like another poor decision among so many others. There is no word on whether the other story adaptations, like Charlie and the Chocolate Factory and Matilda will be affected.
One announcement that was made in response to the subscriber drop is that the company is officially working to bring an ad-supported tier to the service. This has been long rumored, and is a direct response to the economic items on the company's list of issues. More services, including Disney+, have been using or announcing these tiers in recent years. Netflix joining this group is a logical and seemingly inevitable decision.
They also intend to move forward with their password sharing restrictions. This move seems to be more about Netflix itself than responding directly to consumer needs. While the number of subscribers might not change, the number of people using the service could go down, showing a lower lack of interest in new and existing projects.
It's possible that, when these changes don't move the needle in the direction that investors want, they could look to make some changes at the top, including replacing the Board of Directors and even the CEO. We will see over the next few quarters if things get better or fall off faster than they already are.