Netflix’s Next Chapter  

I know I’ve been here for more than 20 years and have been through a couple of these. And yes, they don’t feel great in the moment. But man, it feels great to come out on the other side of it… and we’ll come out the other side of it.
– Netflix Co-CEO Ted Sarandos

Netflix’s Q1 2022 earnings report certainly wasn’t boring. Not only did the SVOD miss its already-weak forecast that it would add 2.5 million subscribers in Q1, it shocked Wall Street with a 200,000-subscriber loss and followed up that dark drama by forecasting the loss of another 2 million subscribers in Q2. By the next morning, Netflix shares had tanked by nearly 40% as several top analysts downgraded the stock, with competitors like Disney, Paramount Global, and Warner Bros. Discovery also taking a hit on the prospect that they too may face similar subscriber challenges. As of Friday morning, Netflix’s stock is down more than 63% year-to-date.

Let’s put this in perspective. Netflix remains the global streaming leader, with nearly twice as many subs as its closest rival Disney+. And while Netflix is diversified across multiple international markets, more than a third of Disney+’s subscribers reside in India and pay only pennies per month. Netflix also would have shown modest subscriber growth had it not cut off 700,000 Russian subscribers to protest the Ukraine invasion (although that still would have been a 2-million sub miss). Meanwhile, Netflix has worked to maintain its operating margins, reporting $1.6 billion in net income for Q1, up from $604 million in Q4 but still down slightly year-over-year from its $1.71 billion profit in Q1 2021. But to be sure, this feels like a major reset for Netflix… and perhaps for everyone.

CFO Spencer Neumann told investors this week that “we’re going to be responsible in terms of how we manage the business” by reducing short-term spending on content and operations “but still growing our spend and still investing aggressively into that long-term opportunity.” No one is quite sure what that means in real dollars (and timing), but co-CEO Ted Sarandos put it this way: “We will continue to grow the content spend relative to prior years.”

Translation: While Netflix’s free-spending days are over for now, competitors shouldn’t expect a reprieve from its overall willingness to throw around cash to snag Hollywood’s best properties and talent. But will Netflix increasingly focus on quality over quantity to maximize its consumer impact? That’s certainly the Hollywood buzz this week.

Netflix also signaled a big philosophical shift this week that may boost growth in the coming months: One is its previously teased crackdown on password-sharing, revealing an estimate that 100 million global Netflix viewers use someone else’s password, with some 30 million of those in the U.S. It’s now clear that the company will go the carrot route rather than the stick, asking paying subs to pay a bit extra to share passwords outside the home rather than simply cutting off their benefactors. But it’s unclear how much that will enhance top-line revenue. In its Latin American test markets, Netflix is charging about $3/mo extra to share a password. We can assume it will be more in the U.S. and Canada. But are we talking $5/mo? More? Less? What’s the sweet spot that keeps current subs happily sharing while not leaving too much money on the table? If all 30 million sharers paid $5 more per month, that’s $1.8 billion/yr. Not bad. And interestingly, that’s the same amount you would bring in if at least half of the 30 million people not paying to watch Netflix now, agreed to pay for the most basic $9.99/mo plan. But it’s possible far fewer would bother, and in that case the carrot approach looks smart, not to mention less problematic from a public relations standpoint. Of course, who knows how many of the current paying subs would stop sharing rather than pay the extra fee?

The other big factor: Advertising. It was one thing when Neumann suggested “never say never” when asked at an investor conference last month about it, but it’s quite another when Netflix founder and co-CEO Reed Hastings openly reversed his long-held stance against advertising during this week’s earnings call. And he did so unprompted. His argument has always been simplicity wins. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice,” he said. “And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense.” Hastings said an ad-supported service could be as much as two years away, but it’s interesting to think what Netflix could do with the advertising model, not only with an ad-supported version but also potential FAST-live channels and ad integration of ads and brand partnerships into gaming, another key area of expansion for the streamer as it acquires creative shops and looks to leverage more of its IP with gaming components. Many consumers are unaware, but Netflix has actually slipped product placements into many of its shows over the years, so this isn’t alien territory for the streamer.

 Next? The bottom line: Between runaway inflation, ongoing supply-chain disruptions, uncertainties around the COVID pandemic, and a war in Ukraine that could further destabilize global economies, the world is a mess right now. Netflix – and perhaps other streamers reporting in the coming weeks – may simply face short-term problems that will dissipate into 2023. But there’s another possibility: that we’ve reached “peak streaming” as consumer subscription fatigue, drunken-sailor levels of content spending, and overall consumer weariness to keep forking over endless cash to watch endless shows that just never end… converges into a new era of restraint. Time will tell which scenario bears out. Call it Streaming 2.0 (or perhaps Cable 3.0). But it’s going to be a wild ride.


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