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Has Netflix lost its chill? On April 20, Netflix reported its earnings for the first quarter of 2022 where the streaming giant revealed losing 200,000 subscribers. This is the first decline in paid users in more than a decade for Netflix and laid bare the challenges that lie ahead for streaming companies around the world.
Netflix faces the heat of streaming
The earnings result landed like shockwaves among investors and saw the company drop more than 25 per cent in extended trading. While losing subscribers in one quarter could have been dismissed, Netflix offered guidance that was an alarm bell for every investor. The company forecasted a global paid subscriber loss of 2 million during the second quarter.
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Netflix last reported a loss in subscribers in October 2011 and when trading resumed, Netflix was in for some pain. Shares of Netflix closed down more than 35 per cent on Wednesday and lost another 3.5 per cent on Thursday. The company has seen more than $50B wiped off its market cap since the video streamer announced its first quarterly earnings.
In the S&P 500, Netflix is the worst-performing stock of this year and is now down over 62.5 per cent year-to-date. The streaming platform was one of the biggest beneficiaries when the COVID-19 pandemic first hit and forced people to shelter indoors, closed offices and international borders.
As people found they had nothing much to do, Netflix became their way to spend time. During the first quarter of 2020, Netflix reported a net paid subscriber addition of 15.77 million and followed up with 10.09 million subscribers added during the second quarter of the same year. During the third quarter of 2020, it fell short of analyst estimates and added only 2.2 million paid subscribers while the fourth quarter saw an addition of 8.5 million subscribers.
In 2021, Netflix added 3.98 million subscribers during the first quarter despite analysts expecting the streamer to bring in 6.2 million subscribers. The second quarter was slightly subdued as well with only 1.54 million subscribers joining the platform. During the third and fourth quarters, Netflix added 4.4 million and 8.28 million subscribers, respectively.
Failure to sustain the pandemic boost
It was evident that Netflix will never be able to bring in new subscribers as it did when the first wave of pandemic struck around the world. The results and weak outlook ahead suggest that the streaming platform is in for some rocky quarters before it probably gets its foot back in the game.
Netflix has been the benchmark for video streaming and the rate at which it was adding subscribers hinted that there was no stopping for the company led by Reed Hastings. However, the video streamer is now facing both headwinds as well as tailwinds. The headwinds come in the form of the inability to retain subscribers and the tailwinds are in the form of increased competition.
With the world cautiously opening and people vaccinated in large proportion, they are no longer seeking digital entertainment. There are already trends showing how people are splurging money on travel and planning exotic holidays after being locked at home for nearly two years. With entertainment having become accessible outside the home, consumers are no longer sticking with Netflix for their digital entertainment needs.
Another factor affecting the likes of Netflix is inflation. The US labour department announced on April 12 that the consumer price index jumped 8.5 per cent in March, the highest jump seen since 1981. Fortune reports that around 36 per cent of Americans are now considering cutting a monthly subscription like Netflix or Prime Video.
Streaming made its debut on the premise of cord-cutting wherein customers no longer favoured cable service. Now, it seems as if the cord-cutters are dumping Netflix.
Competition everywhere
Attrition is not the only challenge facing Netflix right now. The streamer is also facing increased competition from rival streaming platforms. Disney+, the streaming service home to Marvel, Pixar, Star Wars, and other prestige content, is definitely the biggest threat. However, HBO Max is also gaining ground in the US, where Netflix held a stranglehold on digital subscribers.
During the first quarter of 2022, AT&T revealed that HBO Max and HBO added 3 million subscribers to end the quarter with 76.8 million subscribers. While HBO Max is growing, Warner Bros. Discovery said that it is shutting down CNN+, the news streaming platform less than a month after it went live.
If Quibi, the short mobile-centric video platform, lasts for six months then the demise of CNN+ shows the competition is harder now. The competition that Netflix is facing is not only affecting it in the US but also in markets like India where it has struggled to make inroads. With Disney+ Hotstar, Amazon Prime Video, Sony Liv, Zee5, and others offering abundant content catering to the regional market at an affordable price, Netflix needs a change in strategy.
The streamer has indicated that it will consider introducing an ad-supported tier in a year or two but the question is whether consumers have an appetite to wait that long. Another problem hurting Netflix is password sharing, which the streamer has decided to go after in an aggressive way. Netflix needs to go back to its roots of quality content paired with a huge catalogue to win consumers back but not forget the looming threat from platforms like Apple TV+, Disney+, HBO Max, and others.
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