Netflix's quarterly subscriber loss — its first in a decade — has sent shockwaves through the entire streaming industry.
Why it matters: For years Wall Street rewarded Netflix with an outsized market value for its ability to keep expanding its user base. Now, reality is setting in.
Details: Netflix's stock sank more than 20% Tuesday after the streaming giant said it lost 200,000 subscribers in 2022's first quarter and missed revenue targets.
- Because Netflix reports earnings ahead of most competitors, the news sent shares tumbling across the entertainment sector.
- Netflix's stock was already down more than 40% year-to-date, thanks to increased competition and weak growth forecasts.
- Things will get worse before they get better. The streaming giant forecasts losing 2 million more subscribers in the second quarter.
Context: Netflix's decline "calls into question the end-state economics of these businesses," wrote media analyst Michael Nathanson in a note to clients earlier this year, when Netflix first began to show signs of a slowdown.
Be smart: After downplaying competition as a serious threat to their business for years, Netflix executives are finally beginning to admit that the growth of competitive services is taking a toll.
- For years, Netflix was the only major player investing heavily in licensing and producing original content on a large scale. It has long invested in localized streaming content around the world, giving it a major advantage in international markets.
- But over the past few months, Disney+ and HBO Max have begun major international expansions. Disney has said it plans to spend $33 billion on content this year, compared to the $14 billion Netflix spent last year.
Netflix chair and co-founder Reed Hastings also attributed the subscriber slowdown to password sharing, which the company has begun to crack down on.
- In a letter to investors, Netflix said that in addition to its 222 million paying households, it estimates that its service is being shared with over 100 million additional households that don't pay, including over 30 million in the U.S. and Canada — the firm's most lucrative market.
The big picture: Netflix's massive slowdown is a wake-up call for Wall Street, which for years has bet on subscription streaming services as the future of television.
- The problem: While supply has continued to grow, the amount consumers are willing to spend on subscription services has remained relatively consistent over the past few years, according to data from media research firm Magid.
- Most consumers are willing to pay for roughly four services at a time for about $10 monthly per streaming service. Macroeconomic factors, like inflation, and price hikes earlier this year may be making customers less willing to spend.
What's next: Netflix told investors it's weighing offering a cheaper, ad-supported subscription plan over "the next year or two" in an effort to expand its subscriber base.
- As the streaming subscription market becomes more saturated, analysts have argued that an ad-supported tier is Netflix's best option for growth.
- Most of the major general entertainment services, including Disney+, Hulu, Discovery+, HBO Max, Paramount+ and Peacock, offer ad-supported tiers.
What to watch: Big Tech giants are doubling down on free, ad-supported services as a means to lure subscribers who are overwhelmed by rising subscription bills.
- Amazon last week relaunched its free streaming service, IMDb TV, as Freevee, a clear signal to consumers that free is the future.
- YouTube last month said it would stream free, ad-supported TV shows for the first time.
The irony: Many of the traditional entertainment companies that have scrambled to stay relevant in Netflix's shadow have already begun investing in ad-supported streaming products as a way to help offset linear TV advertising declines.
- Fox bought Tubi in 2020. Paramount+ owns Pluto TV. Disney owns Hulu and Comcast owns Xumo and Peacock.
Go deeper: For streaming, the future is free
