Netflix and Shill
What does the subscriber miss mean for the streamer and what might they do next?
Netflix shared it’s Q1 results the other day and the service, for the first time in ten years, reported losing subscribers. It’s share price has since seen a precipitous drop of over 33%. When it comes to streaming services, competition is fierce for eyeballs, so if the leading service is losing them, that’s not a great sign for its prospects or any other streaming services’. To be fair, this probably could have been predicted given the publicity that “Is It Cake?” got.
The lack of subscriber success could have been caused by a handful of things. Maybe it was natural churn, maybe it was competition stealing away eyes, or maybe it was the recent set of price hikes over the last couple of years. On their earnings call, management mentioned “macro factors” played a role. That seems fair, if not unlikely, given the turmoil in Ukraine and easing Covid restrictions. My hunch is that people don’t take the time to cancel their subscriptions in either case.
One of the actually believable, and unfortunate, cases that they brought up was password sharing. Management said: “in addition to our 222m paying households, we estimate that Netflix is being shared with over 100m additional households”. That’s… not great, Bob. Around 1/3 of Netflix viewers don’t pay for the service, that’s a lot of revenue lost. I don’t fully understand why they chose to ignore this problem for the last *checks notes* decade plus, but that’s beyond my paygrade. This poses a problem for both acquisition and revenue though, since if there are fewer potential paying customers to bring onto the platform, there are fewer subscribers and less revenue to be had.
Of course, the next big issue for Netflix has been competition. Although streaming isn’t a zero sum game, other services impede Netflix’s chances of adding more subscribers. Amazon Prime has about 3/4 of the subscribers as Netflix has, but offers much more than just streaming. HBO Max, Disney, and Hulu all cost less than Netflix but offer a surface-level selection that appears just as large. The power of choice for Netflix, which has by far the largest library, is more conceptual than actual. There are thousands of shows and movies most of us would never watch or even discover. But that’s not all, Netflix is losing a lot of the classic series and movies it had rights to over time. Large production companies like Paramount and Disney have pulled content and decided to get into streaming themselves, weakening Netflix’s appeal. I don’t think this will just be a Netflix problem though, and expect to see some similar issues across all platforms in the near future.
Similarly, as I wrote about in my post on the attention economy, Netflix’s competition includes things like Fortnite, Xbox, Playstation, Youtube, Tiktok, etc. It’s not just a streaming competition but an attention competition.
So what can Netflix do? Well, their CEO Reed Hastings mentioned every subscriber’s least favorite potential idea during the call. Ads.
And one way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. And those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription. But as much 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.
While the timing of an ad tier is unclear, the model is not. Spotify has run an ads and ads free subscription platform for years now. Hulu also has similar tiers. Ads aren’t an easy nut to crack though. Certainly not for Netflix with its 200 million subscribers. My limited exposure to ads and marketing at work already has me feeling queasy for them.
But Ben Thompson, as always, has a relatively simple solution for that which removes the need for tiers, at least in certain economies. “Other markets like India have more room to grow, but much lower household incomes, and Netflix’s relatively high prices have been an obstacle.” Non-wealthy countries have millions of potential customers that have not been acquired yet, and might not be willing to fork over $15+ per month for ad-free tv. These same customers, however, might be content with paying lower fees (or no fees) and watching ads so long as they can keep watching content.
Thompson also suggests that the tiered pricing model should work, especially considering so much of Netflix’s tv viewership is watching filler tv (e.g. the Office, Love is Blind) where consumers just leave it up in the background or are spending time on their phone or computer.
The more revenue Netflix can earn, the more differentiated and successful content the platform can create and make investing in the higher tiers worthwhile. Imagine watching Stranger Things and at a climactic scene you get a Progressive commercial. That sucks, and may very quickly convince you to pay for the highest tier of membership. It would be a win for both parties at the end of the day. Netflix generates more revenue and an even more diversified audience (the ad pricing would be high I assume), and consumers get better original content. What could go wrong?