Netflix earnings: with subscribers in decline, what does the future hold?

The original article can be found here.

There’s yet more evidence that the big streaming shakeout looming on the horizon is getting closer to reality.

In its first quarter earnings report Tuesday, Netflix NFLX +3.2% said it lost 200,000 subscribers during the first three months of the year compared to the final quarter of 2021. That marked the first time in a decade that the leading streaming service, which began streaming in 2007, has lost subscribers.

Its global paid memberships fell to 221.64 million, though up by 14 million from the same quarter last year. But in the United States and Canada, its subscribers dropped by 600,000. Further, Netflix projected a loss of another 2 million subscribers during second quarter, indicating the fourth quarter was no blip or fluke. It could be the start of a trend.

Revenue still grew, but slower, at a rate of 9.8% year over year, compared to 24% in first quarter 2021. Revenue totaled $7.686 billion.

The markets were unhappy with the news. In after-hours trading, Netflix dropped 26%, and the market seemed to take the subscriber news as an indicator of the overall sector’s health. Shares of Roku fell 8.3%, while Walt Disney DIS +3.2% Co., parent of fast-growing streamer Disney+, declined 5.3%.

In a letter to investors, Netflix indicated that the pandemic made it difficult to gauge where the streaming marketplace was headed. Quarantines and movie theater shutdowns boosted streaming subscriptions, at a time when new players like HBO Max and Discover+ entered the market.

A return to movie theatres is disrupting Netflix
Photo By: Canva

“Our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds,” reads the letter. “The big Covid boost to streaming obscured the picture until recently.”

The streaming service also lost 700,000 subscribers in Russia, where it suspended service following President Vladimir Putin’s invasion of Ukraine. Netflix also raised prices between $1 to $2 per month for all three of its tiers in Canada and the United States back in January, which undoubtedly sparked some of the turnover.

The future for Netflix
Netflix’s immediate concern, of course, is tamping down on the subscriber leak before it becomes a bleed. The streamer emphasized in its letter to shareholders that it sees quality content as the way to keep subscribers engaged and that it still sees growth potential, noting, “while hundreds of millions of homes pay for Netflix, well over half of the world’s broadband homes don’t yet.”

Of course, as it has also noted, many homes aren’t paying for its services because of password sharing. Netflix recently announced a crackdown on the practice, which it estimates could be going on in as many as 100 million households. In several countries, it began testing a program that makes users pay to share accounts.

In addition to monetizing users currently using the service for free, Netflix’s vision also includes expanding its offerings to attract or retain more users. It is entry into gaming signals a desire to connect with younger people.

Content will continue to be the main driver to the platform, though, and in that arena, Netflix has had several recent wins. Mega-hits such as Squid Game, Don’t Look Up and Bridgerton have set high viewership marks.

Yet Netflix’s biggest hurdle may not be internal but external: the looming streaming battle.

Password sharing is a major challenge for Netflix
Photo By: Canva

A streaming shakeout?
So is this a Netflix problem or a sector problem? Recent indications of a less-than-stellar launch for the new streaming platform CNN+ coupled with price-cutting at Disney+ to attract new subscribers indicate that a shakeout could be coming.

Inflation coupled with the reopening of the economy mean that consumers face greater price pressures and have more choices for entertainment, which could mean cutting back on their streaming subscriptions.

“Streaming’s first act was all about cord-cutting and content finally catching up to consumer preferences. But, pandemic-related or not, Netflix’s numbers, on top of Roku’s in February, show a pullback and the end of that first act,” notes Tal Chalozin, co-founder and CTO of Innovid, a connected TV (CTV) ad platform. “We’ve now entered act two, which will be vastly different. It’ll be driven by bundling SVOD offerings (CNN+, for example) as channels struggle to compete on their own. It’ll also be driven by cheaper SVOD prices as free, ad-supported streaming sees greater growth and the two sides fight for market share.”