Can Netflix turn itself around?

TL;DR

• Netflix’s share price is under pressure once again after it lost 200,000 subscribers in the first quarter of 2022, the first time quarterly reduction since 2011.
• Apart from a loss in subscribers in Russia, Netflix also lost subscribers from its recent price increases amidst rising competition and desire by consumers to save money.
• The company is considering cheaper ad-supported plans and getting users who share accounts to pay to revive its subscription numbers.
• While Netflix has certain merits such as strong cash flow generation, it would need to demonstrate its ability to grow its user base again for investors to be excited about the stock again.

What happened?

Netflix seems to be having a really tough time in recent months with a slew of bad news that came through at its recent first quarter results.

The major disappointment was the announcement that it lost 200,000 subscribers in the first quarter of 2022, the first time it saw a quarterly reduction in subscriber numbers since 2011.

Also worryingly, it gave a downbeat guidance that it could lose another 2 million subscribers in the next quarter.

All of these came through after it had already lowered its guidance on subscriber growth numbers on a post-pandemic slowdown in the previous quarter.

Investors did not take the weakness in the subscriber numbers too well, with the share price of Netflix falling by close to 25% after the results were released.

This would mean that the value of Netflix’s shares would have more than halved since the start of the year.

3 reasons for the decline

To determine if Netflix would be able to turn its fortunes around, we can first look at the multiple reasons behind the decline in subscribers.

This would include the Ukraine crisis, price increases, and rising competition amidst inflation pressures.

1. Russia

When the Ukraine Crisis escalated and sanctions were imposed on Russia, many Western companies announced that they would be pulling out of the Russian market.

Netflix was one of them, and the suspension of its service in Russia led to a loss of 700,000 subscribers.

Excluding this loss, Netflix would have seen a net gain of 500,000 subscribers in the past quarter.

This may not be as alarming as the headline figures would suggest, but still a far cry from management guidance for net additions of 2.5 million subscribers. 

2. Price increase

If you are a Netflix subscriber like us, one of the things you would have noticed is that price increases that have been put through over the past year.

In the US, the company announced in January that it would be raising the price of its standard plan from $13.99 to $15.49 per month.

Management estimated that 600,000 subscribers stopped its service in the US and Canada after its recent price increase.

It looks like there is a limit to how much users would be willing to pay for the streaming service, especially in the face of more competition and a need to tighten their belts!

3. Competition amidst rising inflation

It has become apparent that Netflix is not the only streaming option, especially with other options such as Disney+ coming through.

Netflix also faces competition from other forms of entertainment such as short form video streaming platforms (think TikTok), as well as other social activities as economies continue to re-open.

In Singapore, some of us might actually prefer to meet our friends in groups of 10 rather than to be home watching Netflix!

More importantly, consumers might be curbing non-essential spending to cope with a higher cost of living as sky-high inflation starts to sink in.

In other words, the days of having multiple subscriptions across different streaming services might be open.

According to analytics group Kantar, UK households canceled their streaming subscriptions in record numbers in 1Q22, with about 1.5 million accounts terminated during the period.

The most commonly mentioned reason for cancellation? A desire to save money.

What would Beansprout do?

With the disappointment, management of Netflix has offered a few ways that they intend to revive subscriber growth numbers.

Their ability to succeed in doing so would determine whether we could see a recovery in Netflix’s share price from its recent slump.

1. Offering cheaper ad-supported plans

The CEO of Netflix Reed Hastings had previously said that he is not a fan of the complexity of advertising, and a big fan of the simplicity of subscription.

But with the rising pressure to grow subscriber numbers amidst resistance to constant price hikes, he was also pragmatic in sharing that he is a “bigger fan of consumer choice”.

After all, other streaming providers like Disney+ and HBO have seen some success in their ability to offer ad based subscriptions.

2. Get users who share accounts to pay

Netflix estimates that more than 100 million households worldwide are watching its streaming service for free by using the account of a friend or another family member.

This would include 30 million households in the US and Canada.

To get more people to pay for their own accounts, Netflix is expanding a test introduced last month in Peru and Costa Rica that allows subscribers to add up to two people living outside their households to their accounts for an additional fee.

The verdict: Netflix still has its strengths, including its more than 220 million global subscribers. This has enabled strong free cash flow generation of more than $800 million in the past quarter. However, it might still be too early to get excited about Netflix until it is able to show that it can grow its user base once again!

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