The Fall of Netflix: How Complacency Generates Competition
Streaming services have revolutionised the way that hundreds of millions of people have been able to watch television, films and box sets over recent years and Netflix has been at the forefront of this movement.
The streaming giant has amassed a huge subscription model, peaking during the global lockdowns due to the Covid-19 pandemic which saw millions of homeowners switch their consumption patterns towards home entertainment. Yet now that the pandemic is reaching its end, Netflix is suffering from a new threat that is seeing it losing its subscribers, its share price falling and its credibility weakening at an astronomical rate. But how bad is Netflix’s fall from grace and has this once unstoppable force finally come to a grinding halt?
Despite anticipating a gain of 2.5 million customers in the first quarter of this year, the executives at Netflix were actually faced with a loss of 200,000 subscribers compared with the end of the last quarter in 2021. The outlook is worse for the second quarter of this year, with Netflix themselves expecting to lose 2 million subscribers globally by the start of Q3. Earlier this year Netflix suffered its worst single day percentage drop in its share price since October 2004 after falling 35% in value. In the stock market, price is used as a proxy for profitability; the higher the price of the stock, the more profitable the business should be. The fall in price represented a $54.3 billion dent in its market capitalisation and secured Netflix’s place as the S&P 500’s worst performing stock over April. What is most difficult for executives at Netflix to digest is that there is no single cause for the company’s stock plummeting by 25% in extending trading or for its model suffering a net loss in subscribers for the first time since 2011.
During the pandemic, people were forced to stay at home, with many resorting to streaming sites like Netflix to fill the time. In this period, Netflix’s share price and subscriptions soared to record highs, however as restrictions eased globally and people began returning to the normality they had before the pandemic, demand for the service slowed down. At the same time, the emergence of other streaming services in the form of Disney+ or Amazon Prime meant that increased competition has forced people away from Netflix to other alternatives. Furthermore, with the fallout of the war in Ukraine, Netflix lost 700,000 subscribers after pulling its service out of Russia. Many of these factors aren’t self-inflicted and are merely consequences of global events that are out of Netflix’s control. However, Netflix has made specific changes to its model that have resulted in dramatic consequences for its state of business, most notably regarding its pricing.
In January of this year, Netflix increased its subscription fees for a standard plan from $13.99 to $15.49 a month; this was widely scrutinised and met with a lot of subscribers moving away from the service. This was the first increase in its subscription models since October 2020 which was also followed by a quarter in which Netflix missed their projected financial targets. The bottom line is, people don’t like it when you raise the prices of your goods and services.
The question is, how much of a mistake has Netflix made? Well, the backdrop of this price hike is of course the rapidly rising rates of inflation and consumers worldwide have been made to contemplate whether they are willing to spend their money on a service which is charging higher prices, whilst already trying to squeeze every penny. The fallout from Netflix’s plunge is not only being felt by consumers, but heavily by investors too. When William Ackman, CEO of Pershing Square Capital Management, bought 3 million shares of Netflix in January, he probably didn’t anticipate that shortly after he would have to sell those shares at a loss of $400 million. The “lack of confidence to predict the company’s future prospects” that Ackman felt is being echoed in markets globally with investment in Netflix put options - derivative instruments that would benefit from a decline in the share price of Netflix - growing rapidly.
The future for Netflix and its shareholders is difficult to predict. This year it is estimated that Netflix lost over one-third of its market value already and younger viewers in particular are found to be most likely to leave the service, demonstrating the work that needs to be put in to attract future audiences. The company has devised potential plans to implement an ad-supported version of the platform to boost its subscriber base by lowering its price thresholds and are also trialling a model which will try to put an end to password sharing, which they believe has given over 100 million homes globally access to the site for free. Ultimately Netflix needs innovation and has arguably become complacent after years of fast growth and market dominance. The $20 billion that executives have pledged to spend on content by the end of the year must be put to good use and produce hits like Squid Game or Ozark and not result in disastrous flops that both lack viewership and drain money from the company. Even though figures like Elon Musk have stated that the “woke mind virus” is what is actually hindering Netflix’s growth prospects, rather than competition, password crackdowns or inflation, it is clear that something must change and for many, the change has to come sooner rather than later.
References/ Wider Reading
Netflix Stock Price Drops 35%, Posting Biggest Fall Since 2004 – Wall Street Journal
Netflix Falls to Earth – Wall Street Journal
Netflix, Facing Reality Check, Vows to Curb Its Profligate Ways – Wall Street Journal