Netflix’s world has been turned upside down as stock plunges 35%

By Frank Pallotta, CNN Business

Call Eleven and Sheriff Hopper of “Stranger Things,” because Netflix’s world has been turned upside down.

The company reported Tuesday that it lost subscribers for the first time in more than a decade. The news shocked Wall Street and sent shares plummeting 35% Wednesday morning, wiping out $50 billion in market cap. And this was after the company’s stock had dropped more than 40% year to date.

Simply put, Netflix’s terrible 2022 has now become disastrous.

Once bullish experts and analysts who viewed Netflix as the linchpin of a transforming entertainment industry are now concerned about its growth going forward. And they’re wondering what the future of the company — and all of streaming — might look like.

“What worked until this point may not be working anymore,” Michael Nathanson, a media analyst at MoffettNathanson, told CNN Business. “The world’s changed.”

The question for Netflix — once the untouchable king of streaming — has gone from “what’s next?” to “what now?”

“How do they turn the ship around?”

Netflix said Tuesday that it lost 200,000 subscribers in the first quarter of 2022. Now, 200,000 out of 221 million global subscriptions may seem like little more than a rounding error, but consider that the service was expected to add 2.5 million new users in the first three months of the year — a low bar that had already spooked investors in January.

As if that wasn’t bad enough, Netflix said it expects to lose another 2 million in the current quarter.

The company blames many factors for its subscriber exodus, including competition and widespread password sharing. In its letter to investors Tuesday, Netflix also pointed fingers at “macro factors” that are affecting many companies right now, such as “sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine and some continued disruption from Covid.”

Pulling out of Russia alone cost the company 700,000 subscribers, Netflix said. But even without that, the company still would’ve missed its own expectations by nearly 2 million.

Zak Shaikh, vice president of programming at research-based media firm Magid, believes Netflix needs to answer two questions to change its current narrative: “How do they turn the ship around and start increasing subs again, and how do they generate more revenue per sub?”

“I think it comes down — as it often does — to content,” Shaikh told CNN Business. “Netflix just has to remember what made it so special was that it had the type of content and volume of content you couldn’t get anywhere else. That’s the value proposition they need to return to.”

But it’s not as easy as flipping a switch, no matter how many billions Netflix spends on courting big talent and funding spectacular productions. If making great content was easy, everyone would be doing it.

“Spending more doesn’t equal hits,” Nathanson said. “Everyone’s spending more.”

Another way Netflix could boost revenue: clamping down on password sharing.

The company alluded to that Tuesday, saying it will focus more on “how best to monetize sharing” in terms of passwords. And last month Netflix said that over the last year, it’s been working on ways to “enable members who share outside their household to do so easily and securely, while also paying a bit more.”

“While we won’t be able to monetize all of it right now, we believe it’s a large short- to mid-term opportunity,” the company said Tuesday.

But making customers pay for the privilege of sharing their passwords could actually have a “negative impact” for the company, according to Nathanson. Netflix already raised prices earlier this year, and any additional costs could alienate its base, which is already strapped for cash because of the economy and a surplus of streaming options.

“Is there going to be a spin down to cheaper plans and/or will the goodwill that Netflix has generated just go away?” Nathanson said.

Stranger things are happening

Another area that could help Netflix: advertising. CEO Reed Hastings has historically been strongly averse to adding commercials to the service. Not anymore.

“Think of us as quite open to offering even lower prices with advertising,” Hastings said during Tuesday’s post-earnings call.

Adding a cheaper advertising tier is already happening across the streaming marketplace. Disney, Hulu and HBO Max, which is owned by CNN’s parent company Warner Bros. Discovery, already offer such options.

It makes sense for Netflix to eventually join them, Shaikh said.

“We know that consumers don’t have a problem with advertising as long as it is cheaper and that there is a no-commercial option, too,” he said. “That said, with advertising comes certain content restrictions, and that’s something they may want to avoid. Ultimately, they need to ensure they have the content that consumers want, and then ensure they are monetizing that in the best way possible.”

Netflix getting its groove back is not just important to the company and its investors, but also for all of streaming.

The platform is synonymous with the industry, so if Netflix is struggling, that raises questions about streaming as a solid business model.

On Wednesday morning shares for companies that have built much of their businesses around streaming, such as Disney, Roku, Warner Bros. Discovery and Paramount, were all down alongside Netflix.

Netflix said Tuesday that it will continue to improve the service. And it remains at the top of a marketplace that is changing how people consume entertainment, so it still has that going for it.

“This is just the reality check that is inevitable for an industry leader facing multiple new entrants to the marketplace,” Shaikh said.

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