In the first two quarters of 2022, Netflix lost almost 1.2 million subscribers. Investors began running for the hills and some pundits claimed that the streaming giant’s downfall was imminent. The panic continued when the company cut four percent of its workforce to get its costs in line with “slower revenue growth”. How bad is this malaise? Well, Netflix is certainly under the weather. But this is not the terminal or even critical illness some are suggesting.
Netflix has given many reasons for its lethargic 2022. They range from increased competition and password sharing, to the rise of connected TV and the 700,000 net subscribers lost due to the suspension of Russian accounts. But there is another major factor at play.
Is this a case of exhaustion?
Subscriber growth spiked during the lockdowns of 2020 and 2021. For eight consecutive quarters, Netflix benefited from people staying home and signing up to its platform at a rate much higher than anticipated. Think of these subscribers as potential clients that, based on lockdown circumstances, joined the platform earlier than they normally would have. It’s as if Netflix borrowed against its future self by bringing future subscriber acquisitions forward.
Now the spike is over Netflix is anticipating a further net loss in subscribers in coming quarters. That’s not surprising. However, it’s also not worthy of panic. It’s exactly how you’d expect the numbers to fall as the acquisition curve returns to its normal course.
How can Netflix remedy their subscription troubles?
Netflix doesn’t have a serious acquisition illness, but there’s no denying it’s looking green around the gills. Here’s what the subscription company needs to do to:
The first course of action is one the firm has hinted at: changing the way they approach price discrimination (charging different prices to different customers in order to capture different segments’ willingness to pay). Netflix does this with tiered subscriptions and can take it to another level by introducing an ad-supported tier at a lower price. This isn’t far away, given it announced Microsoft as its tech and sales partner to monetise its ad-supported offering.
If Netflix does this while also clamping down on account sharing (something else it’s hinted at), it may reach non-monetised households. But this remedy comes with a warning. Ad revenue can become ‘addictive’. If Netflix lets ads creep into higher-tier offerings, it risks damaging their diversification credentials. If a subscriber sees ads on the premium tier and the ‘budget’ tier, they may eventually start asking “What’s the difference except the price?”
Managing scarcity and yield will be the key for success here
Netflix also needs to remain focused on the content offering. In the streaming wars, the players derive their competitive advantage from significant differentiation.
Netflix as a first mover has the largest catalogue and subscriber base. Amazon bundles its delivery service with streaming, a unique selling proposition no other streaming platform can compete with – Prime subscribers also get access to some e-books and music, adding to the bang for their buck. And Disney + with its remarkable array of beloved cultural institutions (Star Wars, Marvel, Pixar, ESPN) is almost the must-have platform for parents now.
Of the streaming giants, Netflix arguably has the more vulnerable advantage. In order to maintain its position, it needs to keep investing in, and retain its breadth of, content.
It’s done that with shows like Stranger Things, season four of which reportedly cost about $270 million to produce. And with movies like Gray Man, which cost $200 million and was watched for 88 million hours in its debut weekend (by comparison,the Martin Scorcese film, The Irishman, has been watched for just under 215 million hours over nearly three years.)
Prognosis is positive
Although Netflix has an acute ailment causing symptoms that may alarm some, its overall health is exceptionally good. The company not only continues to lead in the streaming category, it arguably leads the entire Subscription Economy. It’s telling that when people talk about a new and successful recurring-revenue business they refer to it as the “Netflix of X”.
Heavy lies the crown for the streaming king. Streaming services keep emerging and Netflix does stand to lose if it doesn’t manage to steer through this illness. In tumultuous times, it is often appealing to review your strategy and change direction. Others opt to double down.
For Netflix, it is about course correcting. If it pursues price discrimination and diversification strategies, and maintains its commitment to original, high-quality content, it will look back on this illness not as the prelude to a terrible decline, but as little more than a minor sniffle. In an evolving, competitive market, however, a misstep might lead to a slow reduction of market share as the market fragments. It will still be the king, but perhaps with a smaller crown.
Nick Cherrier is helping businesses shift to the Subscription Economy. He is a specialist in revenue growth and marketing, with over 10 years of experience across strategy consulting and digital advertising.