For the first time in a decade, Netflix has lost 200,000 members in the first three months of the year, the company has announced. The sharp decline results from password sharing, changes in economic forces, competition in the streaming space and, more recently, the conflict in Ukraine. The company has also warned that it expected to lose two million subscribers in the second quarter, which sent shares plummeting as much as 25 per cent in extended trading .
“First, it’s 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. We believe these factors will keep improving over time, so that all broadband households will be potential Netflix customers. Second, in addition to our 222m paying households, we estimate that Netflix is being shared with over 100m additional households, including over 30m in the UCAN region (US-Canada),” the company has told shareholders.
Netflix is considering ad-supported price tiers, co-CEO Reed Hastings discussed the potential change during the quarterly investors’ earnings interview. “One way to increase the price spread is advertising on low-end plans,” Hastings said. The company has always supported simplicity of subscriptions over the “complexity of advertising” but ultimately it’s all coming down to “consumer choice”. “Allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense,” he said.
The arrival of ad-supported plans will mark a major shift in how the company views advertisement in its 25-year history during which it has amassed almost 222 million paying customers. Netflix, of course, is not the first company to look at advertisements. Its rivals Hulu, Peacock and HBO Max offer plans that let consumers pay less in return for having their shows occasionally interrupted. In March, Disney announced that it’s adding an ad-supported option to Disney Plus sometime in “late 2022”. The tier is expected to come to the US first before expanding internationally in 2023. Customers who don’t wish to see ads will continue to be offered ad-free plans, Hastings said.
We have to have an Adam Project and a Bridgerton every month
Netflix co-chief executive and chief content officer Ted Sarandos
The streaming service saw a slowdown in business after Russia’s invasion of Ukraine. Pulling out of Russia has cost it 700,000 subscribers. But the company is making good progress in APAC where “we are seeing nice growth in a variety of markets including Japan, India, Philippines, Thailand and Taiwan”.
Analysts have said that Netflix and other similar services were key during the lockdown but with offices opening up, users are reconsidering their purchasing behaviour. The company has said that the large base of users who don’t pay for the service currently is an attractive audience and need to be convinced into converting to subscribers or having their friends and family pay more. Password sharing has been a problem for long and the company believes it accounts for 100 million unauthorised users. To counter, Netflix started testing solutions in three markets in Latin America, with one option allowing current members to pay for additional households.
The company’s future growth lies outside the US. Three out of its six most popular TV shows are in non-English language — South Korean shows Squid Game and All of Us Are Dead, and season four of the Spanish show Money Heist. Netflix has been working on its international production capabilities and is now producing film and television in more than 50 countries. At the same time, the service has had its share of expensive flops recently including Jupiter Ascending and Space Force. “We have to have an Adam Project and a Bridgerton every month,” said co-chief executive and chief content officer Ted Sarandos during the analyst interview.
Besides competition and password sharing, factors like the rate of adoption of smart TVs and data costs are also working against streaming services. In December 2021, the company reduced its India pricing for the first time, with the biggest drop in the entry-level plan, now available at Rs 199 per month compared with Rs 499 per month previously. Sarandos said during the earnings call that they have seen a “nice uptick in engagement in India” but subscriber base is comparatively small. Several of Netflix’s rivals in India offer an ad-supported tier to consumers, so having ads on the service will not be jarring. The only major service that remains ad-free globally is Apple TV+.