Netflix’s stumble could be a warning sign for the streaming industry

Many entertainment executives, tired of catching up with a Silicon Valley intruder, were waiting for Netflix to come along. But that may not have been the way they hoped it would turn out.

Netflix said this week that it lost more subscribers than it took in the first three months of the year, reversing a decade of steady growth. Shares of the company plunged 35% on Wednesday as it lost about $50 billion in market capitalization. The pain has been shared across the industry as shares of companies like Disney, Warner Bros. Discovery and Paramount also fell.

Netflix blamed a number of issues, from increased competition to its decision to cut all subscribers in Russia because of the war in Ukraine. For entertainment executives and analysts, the moment seemed decisive in the so-called streaming wars. After years of trying, they can see a chance to gain ground on their giant rival.

But Netflix’s incredible reversal has also raised a number of questions that will need to be answered in the months to come as more traditional media companies race towards subscription businesses largely modeled on what Netflix has created. Are there too many streaming options? How many people are really willing to pay for it? And could this activity be less profitable and much less reliable than what the industry has been doing for years?

“They’ve gone from a solid business model to a flimsy one,” entertainment veteran Barry Diller said in an interview Wednesday, referring to many of the legacy companies that have recently launched streaming options. “I guess today they say, ‘Maybe the trees don’t grow to the sky.'”

The media industry, worried about declining movie ticket sales and TV ratings, has reshaped itself on the fly to embrace streaming and compete with Netflix. Disney has invested billions. Discovery Inc. and WarnerMedia completed a merger this month to better compete with streaming behemoths. CNN has even introduced a streaming version of itself, which has so far garnered disappointing interest from subscribers.

But Netflix’s sudden problems show that these investments carry a lot of risk. The streaming market may still be a giant in the long run, but the next few years could be tough, said Rich Greenfield, analyst at LightShed Partners and longtime streaming booster.

“Anyway, it looks a lot less profitable, and that’s a problem for everyone,” he said. Fewer subscribers coupled with increased costs due to fiercer competition to create original content means less profit for everyone.

Another concern, according to some analysts, is the so-called churn rate. Consumers are increasingly wary of rising streaming service prices and are increasingly likely to cancel a service when a favorite show ends, said Kevin Westcott, vice president at consultancy Deloitte. . According to Deloitte, 25% of US customers have canceled a streaming service to resubscribe to it within a year.

“They’re frustrated that they have to have so many subscriptions to get all the content they want,” Westcott said.

Netflix’s troubles are increasing pressure on Disney, which will release subscriber counts on May 11. If Disney’s numbers fall short of expectations, the distress signals surrounding the streaming business will intensify.

On Wednesday, Hollywood talent agents also feared the Netflix gravy train was slowing down and the company’s willingness to pay whatever it took for scripts and talent deals was waning. The same goes for producers. Netflix has spent hundreds of millions of dollars over the past five years chasing the Oscars. It has yet to land the Best Picture Oscar, but its commitment to prestige cinema has been hailed.

“The effect on us will be if the new reality forces them to cut their programming budget by $17 billion a year,” said Michael Shamberg, whose four-part documentary about the Three Mile Island nuclear power plant crisis will debut on Netflix. month. “As a producer, I always see them as a first step in coming up with original ideas. If their subscriber growth stabilizes and that forces them to cut back on programming, will they stop taking chances on innovative TV shows and Oscar movies? »

Netflix has acknowledged that fierce competition is part of the reason growth has stalled. The company used to say that its main competition came not from other streaming services, but from diversions like sleep and playback.

Now there’s a question of whether Netflix’s original content is strong enough to set it apart, as even wealthier companies like Apple and Amazon continue to ramp up spending on critically acclaimed shows like “Severance.” , which is streaming on Apple TV+, and the upcoming first season of a “Lord of the Rings” prequel, which Amazon is reportedly spending more than $450 million on.

“The reality is that with so much alternative content, where are the new releases that crush it? Where are the new franchises? asked Mr. Greenfield, the analyst. Things” and “The Crown” would end their broadcasts soon.

Indeed, interest in Netflix’s vast library has shown signs of leveling off.

“For every title in the Netflix catalog, demand is about flat,” said Alejandro Rojas, vice president of applied analytics at Parrot Analytics, a research firm. “The HBO Max and Disney+ catalog is experiencing double-digit growth. It’s a big difference.

Netflix’s performance could also cause rivals to reconsider their own international expansion plans, potentially making more targeted efforts overseas. Netflix subscriptions have declined not only in the United States and Canada, but also in Europe and Latin America.

“Netflix threw the kitchen sink on this,” said industry analyst Michael Nathanson. “They were the first movers, they spent a ton on content, and they’re creating more localized content. They did the right things, and yet they hit a wall.

Netflix’s normally self-confident executives looked particularly unsettled on Tuesday when it released first-quarter results. Co-CEO Reed Hastings, who once swore there would never be ads on Netflix, said the company would consider introducing a cheaper, ad-supported tier within a year or two. . Netflix also said it would crack down on password sharing, a practice it said it had no problem with in the past.

“We’ve been thinking about it for a few years, but when we were growing rapidly, it wasn’t a priority to work on,” Hastings said. “And now we are working very hard on it.”

Netflix has no experience selling advertising, while rivals like Disney, Warner Bros. Discovery and Paramount have extensive advertising infrastructure. And the crackdown on passwords has led some analysts to wonder if Netflix has already reached market saturation in the United States.

Mr. Hastings tried to reassure everyone that Netflix had already been through tough times and would work through their issues. He said the company is now “super focused” on “getting our investors back into our good books”.

Brooks Barnes contributed report.

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