Netflix Blames Very Old Problems for Its Very New Decline
We’re not here to beat up on Netflix. However, the news this morning required kicking Netflix a bit while it’s down – and while its stock is way down.
Netflix stock (NFLX) closed Tuesday at $348.42 per share. When the markets re-opened at 9:30 a.m. ET Wednesday, Netflix was down more than $100 per share to its lowest level since early 2018. It then dropped another $25. It closed Wednesday at $226.19. Last fall, shares briefly traded at $700 apiece.
What the hell happened here? For starters, we should point out that the lion’s share of the Tuesday-to-Wednesday loss actually occurred all at once — just after the U.S. stock markets rang their closing bell on Tuesday, when Netflix revealed it had actually lost 200,000 global paid subscribers in the first quarter of 2022.
Losing subs is never a good look — and it was the first time that’s happened to Netflix in the last 10 years — but the company previously expected to add 2.5 million subs in that period. Netflix also revealed that the current quarter will see the additional loss of an estimated 2 million paid subscribers. Yikes.
In its letter to shareholders, the streamer blamed four factors. The first might be described as Well, We Can’t Control Everything — something that, like the other factors Netflix identified, are not new news. For the company, it’s become “increasingly clear that the pace of growth into our underlying addressable market (broadband homes) is partly dependent on factors we don’t directly control, like the uptake of connected TVs (since the majority of our viewing is on TVs), the adoption of on-demand entertainment, and data costs.”
Second is account sharing. Netflix ended Q1 with about 222 million paying households globally; it estimates those members share their accounts with another 100 million households. All told, the company believes more than 30 million households in the U.S. and Canada (aka UCAN) are not being monetized — but rampant sharing has always been the case.
“We find it interesting that Netflix never disclosed the UCAN data point earlier,” media analysts at MoffettNathanson noted in a Wednesday report. “When asked in the past if UCAN was mature, the company would usually point to the 100 million peak U.S. TV homes as their ultimate U.S. TAM (total addressable market) and say that they had a long way to go. Turns out, they might have been at that 100 million TAM all along with nowhere left to go.”
Netflix also pointed to an issue that impacts every streamer: increased competition from Peacock, HBO Max, Apple TV+, Discovery+, and Paramount+. Again, MoffettNathanson doesn’t quite buy the excuse.
“The acknowledgment that competition has increased in the U.S. streaming video industry and might be impacting growth was also pretty obvious, yet denied by the company for a while,” the analysts wrote. “We question how easy that would be in a world where everyone wants to take share in the market by spending more on content!”
Finally, the company blamed continued Covid disruption, Russia’s invasion of Ukraine, and increased inflation. It’s true: Suspending service in Russia meant the loss of 700,000 subs in Q1. With only 500,000 new subs in the same period, that left Netflix with its 200,000 deficit. Normal operations in Russia would help — but Netflix would still be 2 million subscribers shy of its guidance.
To extricate themselves from this sticky wicket, Netflix wrote to shareholders, “Our plan is to reaccelerate our viewing and revenue growth by continuing to improve all aspects of Netflix — in particular the quality of our programming and recommendations, which is what our members value most.”
Much like the problems Netflix faces, those solutions are not new. However, the company is already cracking down on password sharing via a trial run in three Latin American markets that provides “the choice to pay for additional households” at a discounted rate, or lose access. What Netflix called “more effective monetization of multi-household sharing” is clearly here to stay and will expand.
“We’ve always tried to make sharing within a member’s household easy, with features like profiles and multiple streams,” the company wrote in its Tuesday letter. “While these have been very popular, they’ve created confusion about when and how Netflix can be shared with other households.” (Note: On the user end, no one is actually confused.)
It’ll likely be a year before UCAN subscribers are presented with the same “choice,” Netflix executives said Tuesday evening during an analyst-moderated interview about the disappointing Q1 performance. When that happens, Netflix said, revenue and viewership will become even more important growth indicators than its subscriber tally.
The 12-page shareholder letter went so far as to tout Netflix’s victory over movie-rental chain Blockbuster Video more than a decade ago, but made no mention of adding an ad-supported tier. However, Netflix founder and co-CEO Reed Hastings could not avoid the subject during the webcam conversation.
“Those that have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense.”
“So that’s something we’re looking at now, we’re trying to figure out over the next year or two,” Hastings continued. “But think of us as quite open to offering even lower prices with advertising as a consumer choice.”
As MoffettNathanson noted, “The matter-of-fact disclosure by the company in the interview and not in the press release was odd and almost a throwaway line meant to grab attention.”
Mission accomplished in terms of attention, but it did nothing to salvage market cap in the short term. MoffettNathanson maintained its “neutral” rating on Netflix stock, but lowered its target price by a whopping $105 to $245 per share. The stock closed so low, that valuation target might make it a “buy” (our words, not theirs).
Between the account-sharing crackdown and an ad-supported option, perhaps Netflix can right this ship that suddenly went so wrong. Not only will an ad-supported tier open up a whole new revenue stream, it also will aid the company in monetizing viewers in poorer countries. There are plenty of potential Netflix subscribers in India or certain areas of Africa — they’re just not about to pay $15-$20 per month. They also have demonstrated a willingness to sit through commercials to get streaming content.
What neither Hastings nor the shareholder letter touched were the practicalities. As MoffettNathanson noted: “How will the company introduce an ad tier without cannibalizing their subscription revenues? How and where will they go to market? What are the costs of building out this endeavor?”
All good questions. But do you have anything even more eye-catching for us to end this story? “We have witnessed a company go from growth darling to growth purgatory in an instant,” they wrote.
And we thought we were kicking Netflix when they were down, but really it’s the media analysts providing the kicker.
