Apr 20, 2022 3:31 PM

Netflix Struggles to Hold Its Place in the Streaming Wars

Subscriber fatigue, unwelcome price hikes, and competition from the likes of Disney+ and HBO Max have rattled Netflix. What’s next?

Reed Hastings sitting on a stage with multicolored LED screen behind him

When the direct-to-video docuseries of the streaming wars is filmed, it’s easy to imagine this week’s disappointing Netflix earnings as a big episode-ending cliffhanger: Hemorrhaging customers for the first time in a decade, the company said Tuesday it plans to lose even more throughout 2022—and the future of the company is at stake.

Netflix lost 200,000 more paying customers than it gained in the first three months of the year, and it predicts it’ll lose another 2 million customers in the second quarter. “Our relatively high household penetration—when including the large number of households sharing accounts—combined with competition, is creating revenue growth headwinds,” the company wrote in a shareholder letter. The loss of 700,000 customers in the last three months in Russia, the result of sanctions, was compounded by an unforecast 600,000-customer loss in the United States and Canada, and another 300,000-customer hit across Europe, the Middle East, and Africa. Gains in the Asia-Pacific region helped cushion the blow, but still resulted in a net loss in users.

The results were far, far worse than expected for Netflix, which saw its stock price drop 25 percent in after-hours trading on Tuesday, and plunge another 35 percent after trading opened Wednesday. “It’s now clear that Netflix’s quarterly results will be bumpy from now on,” says Tony Gunnarsson, principal analyst for online video at Omdia.

It’s not just the quarterly reports that look disappointing for Netflix. Two days before the company revealed its underwhelming first quarter earnings, industry analysts Kantar published a report that surveyed the state of streaming services in the United Kingdom. The firm found that in the last three months, 1.5 million households had canceled a subscription to a streaming service, and 38 percent of those cancelations were made in an attempt to cut costs. “The evidence from these findings suggests that British households are now proactively looking for ways to save, and the SVOD [subscription video on demand] market is already seeing the effects of this,” Dominic Sunnebo, global insight director of Kantar’s Worldpanel division, said in a statement. This came after a recent Netflix price hike, the second in 18 months for UK consumers, faced an unusually outspoken backlash on social media.

The news that subscribers are looking to downsize, rather than upscale, their streaming video subscriptions—which lands just months after a separate Nielsen study found nearly half of consumers report feeling overwhelmed by the number of streaming services available—could be troubling for the sector as a whole. As newer players like HBO Max, Disney+, Paramount+, Apple TV+, and others enter the fray, viewers are going to have to make choices about which services are the most essential. What’s unknown is which will survive. “At the center of it is Netflix, this large company with the biggest streaming service, that is now facing a wave of competition that, while they were prepared for it, is hitting them all at once and eating into their market share,” says Julia Alexander, senior strategy analyst at Parrot Analytics.

Alexander believes that Netflix has both the wherewithal and cash reserves to stave off competitors and pull through, but it won’t be competing solely on the strength of its back catalog. Disney, Paramount, and HBO Max (which is part of the newly merged Warner Bros. Discovery) all have scores of TV shows and movies to delve into; Amazon’s recent purchase of MGM gives it a huge trough of content. By comparison, Netflix’s slate of original shows and movies seems lackluster.

Yet, instead of filling out its catalog, Netflix is trying to diversify beyond video. Like, for example, beefing up the staff of the gaming service it launched in November 2021. “They’re going to pour money into branching out into different types of content to be as much of a four quadrant service as they can,” says Alexander, meaning they’re targeting not just men but women, and not just those under 25 but those over 25 too. “But at the same time, they’re aware the competition at this moment is stronger than it has ever been. They need to find a way to be Netflix again, and figure out how to revolutionize parts of this industry.”

But that costs money—which is why price hikes have been levied across large parts of the world. “From an analysts’ point of view, SVODs are still value for money, even with an increase in price,” says Gunnarsson. “You can watch as much content as you want for two pints in a pub, and have unlimited access to all that content.” According to Omdia, UK households subscribe to two services on average—half the amount in the United States. For now, Netflix, like Amazon, is seen as an anchoring service—one that users constantly have, switching out other, smaller competing services when they can afford to do so. “Netflix is the default streaming service,” says Andrew A. Rosen, founder of streaming insights consultancy Parqor. But that can always change.

With 75 million households subscribed to Netflix in the United States, Alexander believes that the service is close to its peak in the country when it comes to adoption. “What you’re really trying to do at that point is to reengage customers who may have left to subscribe to Paramount+ for a month or whatever it might be,” she says. Original content on Netflix, while some may find it underwhelming, falls broadly into two buckets: the reality TV and children’s entertainment that keeps existing subscribers happy, and the big action, drama, and sci-fi shows that reengage subscribers who have taken their business elsewhere. But lapsed subscribers are relatively rare for Netflix, says Rosen: “Their market churn in the US is like, 2.2 percent,” he says. “Their churn is low.”

And while there’s still plenty of room to grow in other markets, those users tend to bring Netflix and other streaming services less money per customer than in the United States, UK, or elsewhere. Average revenue per customer for Disney+ Hotstar in India, Brazil, or Mexico is around $1.06, says Alexander, compared to $6.13 in the United States. “It’s a huge difference when you look at tens of millions of subscribers,” she says. And to eke out the extra money from a market when subscriber growth slows to a trickle, as it has in the US and UK, you have to start raising prices.

Yet the challenge still remains that raising prices at a time of macroeconomic uncertainty is risky business. Rising gas prices, increased costs to heat homes, and squeezes on living standards driven by runaway inflation all have an impact on discretionary spending—which definitely includes streaming video providers. But there is another way to make money while maintaining and building customer numbers: tiered, ad-supported services. In June 2021, HBO Max launched an ad-supported, stripped-down version of its streaming service at a $5 discount to its full $14.99-per-month product. Disney+ is launching an ad-supported tier later this year, joining Peacock, Paramount+, and Discovery+. “Logically, common sense dictates that competition will necessitate more streaming services moving toward a hybrid AVOD [advertising-based video on demand]/SVOD model,” says Gunnarsson.

Indeed, that’s what he believes is behind Netflix’s underwhelming results. “What they didn’t explicitly say, but which may be partly an underlying factor for the expected continued decline in Q2, is that there may be the start of a shift in domestic US trends away from pure paid-for SVOD towards AVOD or hybrid AVOD/SVOD services,” Gunnarsson says. “In other words, US homes are starting to question why they have to pay for SVODs when you can get access to some services via AVOD or at least hybrid AVOD/SVOD. This would explain why Netflix has for the first time stated that it will now look at adding a lower-priced ad-supported tier in the near future.”

If not a cataclysmic moment of reckoning, Netflix is at a crossroads where it has to decide how to maintain growth in order to justify its ongoing expenditure. Does it cut back on spending eye-watering amounts on Netflix originals to justify its slowed subscriber growth? Does it try to maintain the pace of production by overhauling its business model and introducing ads? Or does it double down on customer price hikes to try and squeeze more cash out of viewers? “That’s the question: Can Netflix figure out the next wave?” says Alexander. “In my experience, I don’t bet against Netflix.”