Netflix Loses Subscribers For First Time In A Decade


Our revenue growth has slowed considerably as our results and forecast below show. Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently. While we work to reaccelerate our revenue growth - through improvements to our service and more effective monetization of multi-household sharing - we’ll be holding our operating margin at around 20%. Key to our success has been our ability to create amazing entertainment from all around the world, present it in highly personalized ways, and win more viewing than our competitors.

Going into the quarter with Netflix providing guidance of +2.5 million subscriber adds, the company shocked everyone with poor results: minus 500,000 subscribers this quarter, another minus 2 million expected next quarter. They blamed a 700,000 subscriber loss on their exit from Russian market, which mitigates the current quarter numbers slightly. Obviously, the figures aren’t glowing, but I was struck by how strong the blowback on social media was to the news. Overnight, Netflix has suddenly become a service that nobody uses? That’s how my Twitter feed was acting like on Wednesday at least. Netflix may not be the exciting place anymore, but it’s undeniably the bedrock of modern television, and I don’t see that changing.

Firstly, the company is a behemoth on every metric; viewership, subscriber count and profitability. Sensations like Squid Game cannot be created by any other service; only Netflix has the worldwide content development infrastructure to get it made, and the immense audience reach to make it popular. Kicking Netflix out of culture is going to be really hard. I think nigh impossible. This is especially true when you consider they are the only streaming service with profitable operations. That means everybody else is having to sink into savings (and debt) to merely try and catch up. Maybe Disney+ will overtake them, but Netflix will be able to stick around as a top three player forever.

Of course, the investor base wanted growth and the shares got pummelled on the news for missing such expectations. My position is not talking about the stock market side. A funny parallel is the community opinion of Apple TV+, which has also gone through an about face recently. For two years straight, the general punditry has derided TV+ as a silly venture that will never succeed. Suddenly, Apple wins an Oscar and now everyone thinks TV+ is ruling the world. I have liked TV+ since the beginning, but the reality is TV+ is still an upstart with a long road ahead of it. It is hilarious how quickly people turn on something, positively in the recent case of TV+ or negatively in the recent case of Netflix. The knee-jerk reactions are rarely on the money, and do not reflect the fact that streaming is a very long game.

When TV+ was announced, I argued Apple had a good shot at being successful with it, at a time when the common take was that TV+ would be a failure and fade away. My argument on that was based on the idea that the fundamentals of streaming are relatively simple: get content people want to watch. The way to do that is to attract talent with the promise of money, audience and prestige. Resource-rich Apple had the money part guaranteed, and a decent runway at attaining the rest. Fast forward a couple of years and, sure enough, Apple has picked up the necessary prestige; audience size remains a question mark. Compare that to Netflix, which has a huge audience, a lot of money (recall they are the only profitable service so far) and decent — if not as much as it used to — levels of awards recognition and prestige. If I believed Apple could do it from scratch on that basis, so surely can Netflix from a position of incumbent strength. As long as those fundamentals remain strong, I’m not worried about Netflix’s future. The subscriber numbers need to be a lot worse before I deem it anything other than turbulence and growing pains.

Even as they reach saturation, they also have a lot more headroom to potentially exploit. Netflix has been somewhat complacent when it comes to business model expansion, with CEO Reed Hastings preferring a simpler streamlined approach. Now, he is forced to relent slightly and develop things like a cheaper ad-supported tier of Netflix; something which could catapult their market share even higher than it already is. They can also juice their financials and extract some incremental growth out of the announced crackdown on account sharing. They don’t need to annoy their entire user base with account verification screens; just the fraction that is fragrantly abusing the system with one password shared amongst three, four, or more households. That’s still tens of millions of people to try to monetise, which it can then reinvest in content for the long term. As a reminder of the scale here, Netflix has more freeloaders than most of these services have total subscribers. I think Netflix will be just fine.