An unexpected sharp drop in subscribers has led Netflix to consider changes it has long resisted: minimizing password sharing and creating a low-cost ad-supported subscription.
The impending changes announced Tuesday night are designed to help Netflix regain momentum lost over the past year. The pandemic-induced lockdowns that led to the surveillance frenzy have been lifted, while deep-pocketed rivals such as Apple and Walt Disney have begun chipping away at its vast audience with their own streaming services.
Netflix’s customer base fell by 200,000 subscribers in the January-March quarter, the first contraction the streaming service has seen since becoming available in most of the world other than China six years ago. . The decline stems in part from Netflix’s decision to withdraw from Russia in protest against the war on Ukraine, resulting in a loss of 700,000 subscribers. Netflix predicted a loss of an additional 2 million subscribers in the current April-June quarter.
The sharp erosion, which follows a year of progressively slower growth, has given Netflix investors major jitters. The company’s shares fell 37% midday Wednesday. If the stock closes at this level, the sale will have wiped out nearly two-thirds of Netflix’s market value since the end of last year, wiping out $170 billion in shareholder wealth in less than four months.
The impact on current Netflix customers won’t be clear for some time. For David Lewis in Norwalk, Connecticut, that doesn’t seem like a big deal. Lewis shares a premium plan with his three adult children and some of their friends and says they will keep it, even if they have to cut the friends and each pay for their own accounts.
“We would keep Netflix and pay for our four family members, even if it was more,” he said. “We like the service and what it offers.”
The Los Gatos, California-based company estimates that around 100 million households worldwide watch its service for free using a friend or other family member’s account, including 30 million in the United States and in Canada.
“That’s over 100 million households already choosing to watch Netflix,” said Netflix CEO Reed Hastings. “We just have to be paid to some degree for them.”
To entice more people to pay for their own accounts, Netflix said it will expand a trial program it has set up in three Latin American countries: Chile, Costa Rica and Peru. In these locations, subscribers can extend service to another household at a reduced price. In Costa Rica, for example, Netflix package prices range from $9 to $15 per month, but subscribers can openly share their service with another household for $3.
Netflix has not provided any additional information on how a cheaper ad-supported service tier works or how much it costs. Another rival, Hulu, has long offered an ad-supported tier.
While Netflix clearly believes these changes will help it build on its current 221.6 million global subscribers, the measures also risk alienating customers to the point of canceling them.
Netflix had already been stung by a backlash from customers in 2011 when it unveiled plans to start charging for its then fledgling streaming service, which had been bundled free with its traditional DVD-by-mail service before its international expansion. In the months following this change, Netflix lost 800,000 subscribers, prompting an apology from Hastings for botching the spinoff’s execution.
Tuesday’s announcement was a sobering descent for a company that was buoyed two years ago when millions of locked-at-home consumers were desperate for diversions — a void Netflix was happy to fill. Netflix added 36 million subscribers in 2020, by far the biggest annual growth since its video streaming service launched in 2007.
But Hastings now thinks those outsized gains may have blindsided management. “COVID has created a lot of noise about how to read the situation,” he said during a videoconference on Tuesday.
Netflix started heading in a new direction last year when its service added video games at no extra cost in a bid to give people another reason to subscribe.
Escalating inflation over the past year has also tightened household budgets, prompting more consumers to limit spending on discretionary items. Despite this pressure, Netflix recently increased its prices in the United States, where it has its greatest household penetration – and where it has struggled the most to find more subscribers.
In the last quarter, Netflix lost 640,000 subscribers in the United States and Canada, prompting management to point out that most of its future growth will come from international markets. Netflix ended March with 74.6 million subscribers in the United States and Canada.