The company said it lost 200,000 subscribers in its first
quarter, falling well short of its forecast of adding 2.5 million subscribers.
Suspending service in Russia after the Ukraine invasion took a toll, resulting
in the loss of 700,000 members.
Wall Street sent Netflix's stock tumbling 26 percent after
the bell on Tuesday and erased about $40 billion of its stock market value.
Since it warned in January of weak subscriber growth, the company has lost
nearly half of its value.
The lagging subscriber growth is prompting Netflix to
contemplate offering a lower-priced version of the service with advertising,
citing the success of similar offerings from rivals HBO Max and Disney+.
"Those who have followed Netflix know that I've been
against the complexity of advertising, and a big fan of the simplicity of
subscription," said Netflix CEO Reed Hastings. "But, as much as I'm a
fan of that, I'm a bigger fan of consumer choice."
Netflix offered a gloomy prediction for the spring quarter,
forecasting it would lose 2 million subscribers, despite the return of such
hotly anticipated series as Stranger Things and Ozark and the debut of the film
The Grey Man, starring Chris Evans and Ryan Gosling. Wall Street targeted 227
million for the second quarter, according to Refinitiv data.
The downdraft caught other video streaming-related stocks,
with Roku dropping over 6 percent, Walt Disney falling 5 percent and Warner
Bros Discovery down 3.5 percent.
Hastings told investors that the pandemic had "created
a lot of noise," making it difficult for the company to interpret the
surge and ebb of its subscription business over the last two years. Now, it
appears the culprit is a combination of competition and the number of accounts
sharing passwords, making it harder to grow.
"When we were growing fast, it wasn't a high priority
to work on," Hastings said of account-sharing in remarks during Netflix's
investor video. "And now we're working super hard on it."
CONFLUENCE OF EVENTS
Netflix's first-quarter revenue grew 10 percent to $7.87 billion,
slightly below Wall Street's forecasts. It reported per-share net earnings of
$3.53, beating the Wall Street consensus of $2.89.
While the company remains bullish on the future of
streaming, it blamed its slowing growth on a number of factors, such as the
rate at which consumers adopt on-demand services, a growing number of competitors
and a sluggish economy. Account-sharing is a longstanding practice, though
Netflix is exploring ways to derive revenue from the 100 million households
watching Netflix through shared accounts, including 30 million in the US and
Canada.
This confluence of factors resulted in Netflix reporting
losing customers for the first time since October 2011, catching Wall Street by
surprise.
"They suffered from a combination of approaching
saturation, inflation, higher pricing, the war in Ukraine and
competition," said Wedbush analyst Michael Pachter. "I don't think
any of us expected that all to happen at once."
The world's dominant streaming service was expected to
report slowing growth, amid intense competition from established rivals like
Amazon.com, traditional media companies such as the Walt Disney and the newly
formed Warner Bros Discovery and cash-flush newcomers like Apple.
Streaming services spent $50 billion on new content last
year, in a bid to attract or retain subscribers, according to researcher Ampere
Analysis. That's a 50 percent increase from 2019, when many of the newer
streaming services launched, signaling the quick escalation of the so-called
"streaming wars."
Netflix noted that despite the intensifying competition, its
share of TV viewing in the US has held steady according to Nielsen, a mark of
subscriber satisfaction and retention.
As growth slows in mature markets like the US, Netflix is
increasingly focused on other parts of the world and investing in
local-language content.
"While hundreds of millions of homes pay for Netflix,
well over half of the world's broadband homes don't yet — representing huge
future growth potential," the company said in a statement.
Benchmark analyst Matthew Harrigan warned that the uncertain
global economy "is apt to emerge as an albatross" for member growth
and Netflix's ability to continue raising prices as competition intensifies.
Streaming services are not the only form of entertainment
vying for consumers' time. The latest Digital Media Trends survey from
Deloitte, released in late March, revealed that Generation Z, those consumers
ages 14 to 25, spend more time playing games than watching movies or television
series at home, or even listening to music.
The majority of Gen Z and Millennial consumers polled said
they spend more time watching user-created videos like those on TikTok and
YouTube than watching films or shows on a streaming service.
One market observer said Netflix's stock has benefited from
expectations of perpetual growth.
"Today's report shows that there is a limit to that
long-term bullish thesis," said David Keller, chief market strategist at
StockCharts.com. © Reuters
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