Netflix Inc says that inflation, the war in Ukraine and fierce competition contributed to subscriber losses for the first time in more than a decade and predicted greater losses in the future, marking an abrupt shift in fortune for a streaming company that fell during the pandemic flourished.
The company said it lost 200,000 subscribers in the first quarter, falling far short of its 2.5 million subscriber forecast. The suspension of service in Russia after the invasion of Ukraine took its toll, resulting in the loss of 700,000 members.
Wall Street plunged Netflix stock by 26 percent after the bell on Tuesday, erasing about $40 billion of its market cap. Since warning of weak subscriber growth in January, the company has lost nearly half of its value.
The lagging subscriber growth is prompting Netflix to consider offering a cheaper version of the service with ads, citing the success of similar offerings from rivals HBO Max and Disney+.
“Those who have followed Netflix know that I am against the complexity of ads and a big fan of the simplicity of subscriptions,” said Netflix CEO Reed Hastings. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice.”
Netflix made a bleak forecast for the spring quarter, predicting it would lose 2 million subscribers, despite the return of highly anticipated series like Stranger Things and Ozark and the debut of the movie The Gray Man, starring Chris Evans and Ryan Gosling. Wall Street was targeting $227 million for the second quarter, according to data from Refinitiv.
The downdraft caught other video streaming-related stocks, with Roku falling more than 6 percent, Walt Disney down 5 percent and Warner Bros Discovery down 3.5 percent.
Hastings told investors the pandemic had “caused a lot of noise,” making it difficult for the company to interpret the rise and fall in its subscription business over the past two years. Now it seems the culprit is a combination of competition and the number of accounts sharing passwords, making it harder to grow.
“When we were growing fast, it wasn’t a high priority to work on,” Hastings said of account sharing in comments during Netflix’s investor video. “And we are now working super hard on that.”
Confluence of events
Netflix’s first quarter revenue grew 10 percent to $7.87 billion, slightly lower than Wall Street’s forecast. It reported net earnings per share of $3.53, beating the Wall Street consensus of $2.89.
While the company remains optimistic about the future of streaming, it attributes slowing growth to a number of factors, including the speed at which consumers use on-demand services, a growing number of competitors and a sluggish economy.
Account-sharing is an old practice, although Netflix is looking for ways to monetize the 100 million households that watch Netflix through shared accounts, including 30 million in the United States and Canada.
This confluence of factors led to Netflix losing customers for the first time since October 2011, leaving Wall Street by surprise.
“They suffered from a combination of approaching saturation, inflation, higher prices, the war in Ukraine and competition,” said Wedbush analyst Michael Pachter. “I don’t think any of us expected this to happen all at once.”
The world’s dominant streaming service was expected to report slowing growth amid fierce competition from established rivals like Amazon.com, traditional media companies like Walt Disney and the newly formed Warner Bros Discovery, and cash-flush newcomers like Apple Inc.
According to researcher Ampere Analysis, streaming services spent $50 billion on new content last year in an effort to attract or retain subscribers. That’s a 50 percent increase from 2019, when many of the newer streaming services launched, pointing to the rapid escalation of the so-called “streaming wars.”
Netflix noted that despite increasing competition, its share of TV viewing in the US has remained stable according to Nielsen, a sign of subscriber satisfaction and retention.
With growth slowing in mature markets like the US, Netflix is increasingly targeting other parts of the world and investing in local language content.
“While hundreds of millions of homes are paying for Netflix, more than half of the world’s broadband homes are not yet doing so — representing huge future growth potential,” the company said in a statement.
Benchmark analyst Matthew Harrigan warned that the uncertain global economy “tends to emerge like an albatross” to membership growth and Netflix’s ability to keep raising prices as competition heats up.
Streaming services are not the only form of entertainment competing for consumer time. The latest Digital Media Trends survey from Deloitte, published in late March, found that Generation Z, consumers ages 14 to 25, spend more time playing games than watching movies or TV shows at home or even at home. listen to music.
The majority of Gen Z and Millennial consumers surveyed said they spend more time watching user-created videos like those on TikTok and YouTube than watching movies or shows on a streaming service.
A market observer said Netflix’s stock has benefited from expectations of continued growth.
“Today’s report shows there is a limit to that long-term rising thesis,” said David Keller, chief market strategist at StockCharts.com.