SAN FRANCISCO –
Due to an unexpectedly sharp drop in subscribers, Netflix is considering changes to its service it has long resisted: minimizing password sharing and creating a low-cost subscription backed by ads.
The looming changes announced late Tuesday are intended to help Netflix regain the momentum it lost over the past year. Pandemic-driven lockdowns that led to binge-watching have been lifted, as deep-pocketed rivals like Apple and Walt Disney have begun ripping off massive audiences with their own streaming services.
Netflix’s customer base fell by 200,000 subscribers during the January-March quarter, the first contraction since the streaming service became available outside of China six years ago in most of the world. The decline stemmed in part from Netflix’s decision to pull out of Russia to protest the war against Ukraine, which resulted in a loss of 700,000 subscribers. Netflix forecast a loss of another 2 million subscribers in the current April-June quarter.
The erosion, stemming from a year of increasingly slow growth, has left another key constituency for Netflix confused: its shareholders. After revealing the disappointing performance, Netflix shares fell 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 about US$150 billion in shareholder equity in less than four months.
Aptus Capital Advisors analyst David Wagner said it is now clear that Netflix is grappling with an impressive challenge. “They are in no man’s land,” Wagner wrote in a research note Tuesday.
The Los Gatos, California company estimates that approximately 100 million households around the world watch the service for free through a friend’s or other family member’s account, including 30 million in the US and Canada. “That’s more than 100 million households who already choose to watch Netflix,” Hastings said. “We just need to get them paid to some degree.”
To encourage more people to pay for their own bills, Netflix has indicated it will expand a pilot program it has run in three Latin American countries: Chile, Costa Rica and Peru. At these locations, subscribers can extend the service to another household at a discounted price. For example, in Costa Rica, Netflix subscription prices range from $9 to $15 per month, but subscribers can openly share their service with another household for $3.
Netflix did not provide additional information about how a cheaper, ad-supported service tier would work or how much it would cost. Another rival, Hulu, has long offered an ad-supported tier.
While Netflix clearly believes these changes will help the company build on its current 221.6 million subscribers worldwide, the moves also risk alienating customers to the point of canceling the service.
Netflix was previously stung by a customer backlash in 2011 when it revealed plans to start charging for its then-emerging streaming service, which had previously been bundled for free with its traditional DVD-by-mail service before expanding internationally. In the months following that change, Netflix lost 800,000 subscribers, prompting an apology from Hastings for messing up the spin-off’s execution.
Tuesday’s announcement was a sobering comedown for a company backed two years ago when millions of consumers huddled at home were desperate for distraction — a void that Netflix was eager to fill. Netflix added 36 million subscribers in 2020, by far the biggest annual growth since the debut of its video streaming service in 2007.
But Netflix CEO Reed Hastings now believes those excessive profits may have blinded management. “COVID caused a lot of buzz about how to read the situation,” he said in a video conference on Tuesday.
Netflix started moving in a new direction last year when its service added free video games in an effort to give people one more reason to subscribe.
The escalating inflation of the past year has also put pressure on household budgets, causing more consumers to rein in their spending on discretionary items. Despite that pressure, Netflix recently raised its prices in the US, where it has the greatest penetration of households and where it struggled most to find more subscribers.
In the most recent quarter, Netflix lost 640,000 subscribers in the US and Canada, prompting management to point out that most of its future growth will come in international markets. Netflix ended March with 74.6 million subscribers in the US and Canada.