An unexpectedly sharp drop in subscribers has Netflix considering changes to its service it has long resisted: minimizing password sharing and creating a low-cost ad-supported subscription.
The impending changes announced Tuesday evening are designed to help Netflix regain the momentum it lost over the past year. The pandemic-induced lockdowns that led to the surveillance frenzy have been lifted as 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 seen since the streaming service became available in most of the world outside of 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 erosion, after a year of progressively slower growth, has rattled another key constituency for Netflix – its shareholders. After revealing its disappointing performance, Netflix stock plunged more than 25% in extended trading. If the stock decline extends into Wednesday’s regular trading session, Netflix shares will have lost more than half their value so far this year, wiping out an estimated $150 billion in shareholder wealth in less than four months.
Aptus Capital Advisors analyst David Wagner said it was now clear Netflix was facing a daunting challenge. “They’re in no-(wo)man’s land,” Wagner wrote in a research note Tuesday.
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,” Hastings said. “We just have to get 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 in place 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 that they cancel the service.
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 previously came 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 Netflix CEO Reed 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 hiked 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.