Understand what the crisis at Netflix indicates about the future of streaming

It’s a basic formula in the television business: make a successful show, renew it, and attract even larger audiences. But Netflix, which for more than 20 years has been messing with the rules of the entertainment business, may have found a way to defy even that convention.

This quarter, the streaming service will release long-awaited new seasons of two of its most popular shows, “Ozark” and “Stranger Things.” But instead of envisioning a growth in its subscriber base, the company announced this week that it expects to lose two million subscribers in the coming months, thanks to a combination of more intense competition, a maturing US market and its decision to increase prices at a time when consumers are already having to face rising inflation.

After years of bending Hollywood to its will, Netflix finally dropped back to earth this week, revealing that its streak of strong, uninterrupted subscriber growth had come to an end. Its share price has dropped 40%, which has reduced its market capitalization to US$97 billion (R$459 billion) – from US$300 billion (R$1.41 trillion) in November.

The news is a wake-up call for the streaming industry, which has grown in the wake of Netflix. The company’s extraordinary success has inspired many of America’s largest media conglomerates to launch or acquire streaming platforms, including Disney’s Hulu and Disney+, Warner Bros’ HBO Max. Discovery, NBCUniversal’s Peacock, and Paramount’s Paramount+. Tech groups Amazon and Apple have also launched streaming services in an effort to emulate Netflix’s innovative model.

This model transformed the television and film industries and launched a fiercely competitive war for subscribers. But the growth of the streaming industry depended on the assumption that there was a worldwide market of up to a billion households willing to pay for these services. Now, some analysts say the effective market could be much smaller — and it’s time to rethink the streaming business that Netflix pioneered.

Netflix’s warning of its subscriber drop “was almost an acknowledgment … that this business is not so good,” said Michael Nathanson, an analyst at MoffettNathanson and a longtime skeptic of the Netflix model. “Which makes me wonder if media companies should temper their ambition to be like Netflix a little bit.”

The content arms race

Netflix’s dismal results appeared to signal the end of an experimental and costly era of streaming, characterized by rapid growth, unfettered spending and a heavy dose of swagger.

When Netflix launched its streaming service in the United States in 2007, the company positioned it as a new format that would free viewers from the old-fashioned conventions of commercial television and the high costs and rigid programming of “premium” cable channels.

Initially, Netflix offered its subscribers access to existing movies and TV shows licensed from other creators. But in 2012, the year the company started operating in the UK, it started developing its own content, and found initial success with a political drama set in Washington called “House of Cards”. Netflix inverted the traditional television model by releasing all episodes at once instead of weekly, which allowed viewers to watch entire seasons at once. [um fenômeno que se tornou conhecido como “binge-watching”].

The platform proved to be an extraordinary success. In the ten years since then, it has gained 222 million subscribers in 190 countries, a growth of more than 750%, and at the end of last year it registered a profit for the first time in its history.

Netflix’s rise was helped by a long period of loose monetary policy and an all-time high in equity markets, which allowed the company to spend heavily as long as investors continued to believe in the strategy. In an environment of low interest rates, investors looking for good returns were happily buying Netflix debt, which paid for the company’s heavy spending on developing its own content.

From 2019 to 2021, Netflix invested US$55 billion (R$ 260 billion) in the production of films and television shows, as part of its race to compete with the big networks and Hollywood studios. The advance of Netflix generated a race for territory in the industry, and all companies had to spend big to win. In 2019, Amazon spent $1 billion on a single series — an adaptation of “The Lord of the Rings” that is seen as the most expensive TV show of all time.

“One of the reasons why [todos] invest so heavily [entre 2017 e 2019] it was the theory that for the next two or three years, all that mattered was acquiring subscribers,” said the former president of a major streaming service. “That window of opportunity was when consumers would make their transition. It was necessary to conquer them. Netflix knew that.”

But the arms race for content only intensified with the arrival on the market of new competitors, endowed with ample resources, and with people trapped at home during the pandemic, which increased the number of viewers. The expectation is that American media groups, together, will invest more than US$ 100 billion (R$ 473 billion) in content this year. Netflix alone accounts for more than $17 billion of that total.

Those amounts are “historic, and they set precedents,” says Tom Nunan, a professor in the School of Theater, Film and Television at the University of California at Los Angeles and executive producer of the Oscar-winning film “Crash.” “These are numbers of the kind we often see associated with the Department of Defense. Coming from individual companies like these, they are almost unimaginable — and certainly unsustainable.”

Investors change channels

Until recently, Wall Street had been applauding lavish streaming spending. After Disney announced its streaming programming based on Marvel and Star Wars properties in December 2020, for example, the company’s stock briefly hit a record high.

But that feeling has changed, now. A wake-up call for the streaming industry came in February, when Paramount executives announced large investments in the streaming service Paramount+ and saw a nearly 20% drop in the company’s stock price the next day.

Wall Street was not convinced that the shift to streaming would provide Paramount with more profits. But Netflix’s announcement this month seems to have confirmed something for investors: that no matter how good the programming is, the streaming industry is unlikely to generate the kind of profits that television and movies provided before streaming. .

“It’s an absolutely inferior economic model [ao da televisão a cabo]”, said the former president of a major streaming service. “The price that would have to be imposed to reproduce the results of the market [de TV a cabo] would be astronomical.”

Read more about Netflix

Netflix announced several measures this week to try to mitigate the effect of the slowdown on consumer growth. In a video chat with investors on Tuesday, Spencer Neumann, the company’s vice president of finance, said it would “reduce some of our spending increases,” although Netflix representatives said it would continue to spend. more than its industry rivals in the production of new films and series.

The company will also drop its longstanding opposition to advertising on the Netflix platform, and Reed Hastings, one of its founders, said a cheaper version of the service, financed in part by advertising, could emerge within a year or two. .

“I was against the complication of advertising and have always been a big fan of the simplicity of signature,” Hastings said Tuesday. “But as much of a fan as I am of that, I’m even more of a fan of consumer choice.”

However, Hastings pointed out, the most important improvement Netflix needed to make was in the quality of its programming — the side of the business that is run by Ted Sarandos, its co-executive chairman.

Analysts agree. “Netflix should be creating a lot more movies and TV shows that people feel compelled to watch, and that grow into enduring franchises,” wrote Rich Greenfield, an analyst at LightShed, in a research note. “Netflix content, especially English content, just doesn’t measure up to the level of spending they have.”

This is where Netflix has faced the most severe competition from rival streaming services operated by long-established content creators such as HBO, Disney, NBCUniversal and Paramount — not to mention the well-heeled Amazon and Apple, which should not adopt cost-cutting measures for the foreseeable future.

Sarandos, who has worked hard to make Netflix part of the Hollywood fabric, took a defensive tone this week when he spoke of the need to improve the company’s programming. He claimed that Netflix movies like “Don’t Look Up,” “Red Warning” and “The Adam Project” are among “the most watched and most popular on the planet” (although, as the company doesn’t release ratings, investors only have his word on this.)

He reminded investors that his company was still the fledgling when it came to content creation. “We’ve been in this business for a decade,” he said. “That’s about 90 years less than all our competitors.”

But Wall Street’s patience may have run out. Some analysts are already urging the company’s rivals to rethink their streaming spending. Pointing out that Sony has been making money by selling its movies and TV shows to streaming companies — a strategy known as the “arms dealer” strategy — Greenfield suggested that some of the traditional studios should look into the idea of ​​abandoning streaming and become content providers.

“While it seems difficult to understand the abandonment of streaming ambitions after investing so much capital into producing original shows for streaming over the past few years, we wondered if this might not be a difficult decision, but one that the management teams at NBCUniversal and Paramount need to make. “, wrote Greenfield.

Translation by Paulo Migliacci