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The world of Netflix has been turned upside down as shares plunge 35%

The company announced Tuesday that it has lost subscribers for the first time in more than a decade. The news shocked Wall Street and sent shares tumbling 35% on Wednesday morning, wiping out $50 billion in market capitalization. And it was after shares of the company had fallen more than 40% since the start of the year.

Simply put, Netflix’s dreadful 2022 has now turned disastrous.

The once optimistic pundits and analysts who saw Netflix as the linchpin of a changing entertainment industry now worry about its growth in the future. And they’re wondering what the future of the business — and all of streaming — might look like.

“What has worked so far may not work anymore,” Michael Nathanson, media analyst at MoffettNathanson, told CNN Business. “The world has changed.”

The question for netflix (NFLX) – once the untouchable king of streaming – has gone from “what next?” to “what now?”

“How do they turn around?”

Netflix said on Tuesday it lost 200,000 subscribers in the first quarter of 2022. Now, 200,000 out of 221 million global subscriptions might seem like little more than a rounding error, but consider the service needed to add 2.5 million new users in the first three months of the year — a low bar that had already spooked investors in January.

As if that weren’t enough, Netflix said it expects to lose another 2 million in the current quarter.

The company attributes many factors to its subscriber exodus, including competition and the widespread sharing of passwords. In its letter to investors on Tuesday, Netflix also pointed to “macro factors” affecting many companies right now, such as “slow economic growth, rising inflation, geopolitical events such as the invasion of ‘Ukraine by Russia and some ongoing Covid disruptions’.

The withdrawal from Russia alone cost the company 700,000 subscribers, Netflix said. But even without that, the company would still have missed its own expectations by almost 2 million.

Zak Shaikh, vice president of programming at research-based media company Magid, believes Netflix needs to answer two questions to change its current narrative: “How do they turn the ship around and start growing subscribers again, and how do they generate more revenue per penny?”

“I think it comes down to — as it often does — the content,” Shaikh told CNN Business. “Netflix just has to remember what made it so special is that it had the kind of content and the volume of content that you couldn’t get anywhere else. That’s the value proposition they have to come back to. .”

But it’s not as easy as flipping a switch, no matter how many billions Netflix spends wooing great talent and funding spectacular productions. If it were easy to create great content, everyone would be doing it.

“Spending more doesn’t equal success,” Nathanson said. “Everyone is spending more.”

Another way for Netflix to increase its income: restrict the sharing of passwords.

The company hinted at this on Tuesday, saying it would focus more on “the best way to monetize sharing” in terms of passwords. And last month, Netflix said that over the past year it had been working on ways to “enable members who share outside of their household to do so easily and securely, while paying a little more”.

“While we can’t monetize everything right now, we believe this is a great opportunity in the short to medium term,” the company said Tuesday.

But charging customers for the privilege of sharing their passwords could actually have a “negative impact” for the company, according to Nathanson. Netflix already raised prices earlier this year, and any additional cost could alienate its base, which is already cash-strapped due to the economy and a glut of streaming options.

“Is there going to be a rotation to cheaper plans and/or will the goodwill that Netflix has generated just disappear?” Nathanson said.

strange things happen

Another area that could help Netflix: advertising. CEO Reed Hastings has always been strongly against adding ads to the service. No more.

“Consider us completely open to offering even lower prices with advertising,” Hastings said during Tuesday’s post-earnings call.

Adding a cheaper level of advertising is already happening in the streaming market. Disney, Hulu and HBO Max, which is owned by CNN parent company Warner Bros. Discovery, already offer such options.

It makes sense that Netflix would join them eventually, Shaikh said.

“We know consumers are fine with advertising as long as it’s cheaper and there’s a non-commercial option as well,” he said. “That said, advertising does come with some content restrictions, and that’s something they may want to avoid. Ultimately, they need to make sure they have the content that consumers want. , and then make sure they monetize it in the best possible way.”

Netflix’s return isn’t just important for the company and its investors, but for streaming as a whole.

The world of Netflix has been turned upside down as shares plunge 35%

The platform is synonymous with the industry, so if Netflix is ​​in trouble, it raises questions about streaming as a solid business model.

Wednesday morning actions for companies that have built much of their business around streaming, like Disney, Roku (ROKU)Warner Bros. Discovery and Paramount, were all alongside Netflix.

Netflix said on Tuesday it would continue to improve the service. And it remains at the top of a market that is changing the way people consume entertainment, so it still has that edge.

“It is only the reality check that is inevitable for an industry leader faced with multiple new market entrants,” Shaikh said.

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