Loss of Netflix subscribers jeopardizes streaming business model

Netflix stopped the bleeding. Last quarter, the streaming group shocked Wall Street and Hollywood with the sudden end of its decade-long boom, prompting a drastic reaction comparable to the dot-com crash.

This quarter, Netflix won by setting expectations low and exceeding them, with the help of a new season of the hit series “Stranger Things.” Shares rose more than 7% in aftermarket trading after Netflix said 970,000 subscribers canceled their accounts in the second quarter.
It was the worst subscriber loss in its history, but as Netflix had predicted twice as many defections, investors were relieved.

“It’s tough to lose 1 million and call it a success,” said co-founder and chief executive Reed Hastings on Tuesday. “We’re talking about losing 1 million instead of 2 million. Our enthusiasm is tempered by less bad results.”

With a recession looming and US inflation soaring to a 40-year high, Netflix is ​​dealing with a more cost-conscious consumer. While it previously appealed to people as a cheap alternative to expensive television bills, Netflix today is the most expensive option among a sea of ​​copycat streaming services.

“The cost of living crisis [está] having a profound impact on all companies,” said Paolo Pescatore, analyst at PP Foresight. “No one is immune.”

This spending squeeze is happening as the world’s biggest media and technology companies launch a brave and costly effort to compete with Netflix. “Competition has reached a bit of an absurd level,” said Rich Greenfield, an analyst at LightShed, referring to the high spending commitments made by new entrants. “I don’t think anyone in the investment community predicted Peacock [da Comcast] would lose $2.5 billion.”

The impact was hard and sudden. In January, analysts predicted that Netflix would add 20 million subscribers in 2022. Now, the company expects to reach that level in the first nine months.

Netflix was the worst-performing stock on the S&P 500 in the first half of this year. Its market value has shrunk from more than $300 billion in November to $90 billion. Netflix’s “big fix”, as it became known in Hollywood, has sparked anxiety about the streaming business model and the future of entertainment.

Netflix’s blunder triggered a sell-off in media stocks, wiping out tens of billions in value from giants like Disney and Warner Bros. Morgan Stanley this week described the situation as the “first streaming recession”.

“Video streaming revenues may prove more vulnerable than expected to a global recession and lower levels of consumer spending,” warned analyst Ben Swinburne. Bank of America warned that streaming “has quickly become a commoditized product.”

The question for both Wall Street and Hollywood is whether this slowdown is temporary or whether the streaming business is fundamentally less exciting than executives assumed. Netflix’s second-quarter results offered lukewarm evidence supporting the first alternative. The company is on a path back to growth, albeit by a thread, predicting it will gain 1 million subscribers in the third quarter.

Cancellations were sharpest in the US and Canada, Netflix’s biggest market, where nearly 2 million people canceled their subscriptions in the first half of this year. At $15.49 a month on its most popular plan, Netflix costs more than its main competitors like Disney Plus and HBO Max, which charge $8 and $15, respectively.

Netflix is ​​also being challenged over its content. Co-chief Ted Sarandos on Tuesday described the company’s schedule as “delivering hits on top of hits.” But it trailed HBO in Emmy nominations — a measure of quality — this year, with 105 to HBO’s 140.

It’s unclear how many streaming services families will pay for, especially in a recession, and Netflix has lost its “necessary and invincible position,” said Michael Nathanson, an analyst at MoffettNathanson. There are already more streaming video subscriptions than people in the United States, with 380 million subscribers out of a population of 330 million, according to data firm Ampere Analysis.

Globally, Netflix had already disclosed a pool of 1 billion potential customers who have access to the internet. Now, Nathanson warns that the potential market could be closer to 400 million. As of this time of year, Asia Pacific is the only region where Netflix is ​​gaining subscribers.

The company gained 2.2 million subscribers in the region in the first half of 2022, losing customers in the rest of the world. Netflix executives appeared to be in damage control mode this week, shooting at rivals and offering data to prove their dominance. For example, during the 2021-22 television season, Netflix attracted more viewership than CBS and NBC combined, according to Nielsen figures provided by Netflix.

Other data points were less compelling, such as Twitter engagement for “Stranger Things” surpassing that of Paramount’s “Top Gun Maverick” – the film that grossed more than $1 billion at the box office. Despite this year’s slump, Netflix remains far ahead of its rivals, with 221 million subscribers to Disney Plus’s 138 million. Netflix also profits from its streaming service, unlike its competitors, and expects to end the year with $1 billion in free cash flow.

However, Netflix management announced sweeping changes to revive subscriber growth. It is working with Microsoft to offer a cheaper service that runs ads and plans to limit password sharing, through which it estimates 100 million families watch programming for free.

Those moves won’t occur until 2023. For now, Netflix will rely on hits to get it through the second half of the year. It will be helped by a new season of “The Crown” and the sequels of “Knives Out” and “Enola Holmes”.

“We’re performing very well on the content side,” Hastings said. But the streaming group still doesn’t have its own “Star Wars” or “Harry Potter.” Ross Benes, analyst at Insider Intelligence, warned: “Unless [a Netflix] find more high-profile franchises, you’ll end up fighting to stay ahead of competitors who have their eyes on your crown.”

Translated by Luiz Roberto M. Gonçalves