After shares tumbled earlier this year on concerns about subscriber growth, the streaming leader said it was losing subscribers when it reported first-quarter earnings on Tuesday. Netflix (NFLX) now has 221.6 million subscribers worldwide. It lost 200,000 subscribers in the first quarter of 2022, the company reported on Tuesday. The service was expected to add 2.5 million subscribers and was expected to lose another 2 million subscribers in the second quarter of 2022.
The report sent the stock down as much as 25% in after-hours trading.
Netflix’s fourth-quarter earnings were $1.5 billion, up from $1.7 billion in the year-ago quarter. Revenue rose 9.8% to $7.8 billion.
It cannot be overstated how bad this is for the king of streaming right now. The company’s stock is down more than 40% year-to-date, and earnings have raised many concerns from investors about growth — concerns that were recognized Tuesday when Netflix not only missed the low bar of its own expectations, but it also failed lost thousands of subscriptions as well.
What happened?
In its letter to investors, the company said that since streaming began in 2007, the company “has operated with the strong belief that on-demand entertainment delivered through the Internet will replace linear television,” adding, in the near future ” we are not increasing sales as fast as we would like.”
Netflix said the pandemic “clouded the picture by significantly boosting our growth in 2020, leading us to believe that most of our slowed growth in 2021 was due to the Covid advantage.”
But there are many different factors behind subscriber stagnation, including competition from traditional media companies that have entered the streaming market in recent years, as well as widespread password sharing.
“In addition to our 222 million paying households, we estimate that Netflix is shared with over 100 million other households, including over 30 million in the [United States/Canada] region,” according to the company.
The company also blamed “macro factors” affecting many companies right now, such as “sluggish economic growth, rising inflation, geopolitical events like Russia’s invasion of Ukraine, and some ongoing disruptions from COVID that are also likely to have an impact.”
Netflix said pulling out of Russia cost the company 700,000 subscribers.
The company’s poor report is likely to roil the streaming market since so many other companies have shifted their business strategies to compete with Netflix.
Disney (DIS), for example — one of Netflix’s biggest competitors — lost about 5% on Tuesday night.
What now?
Netflix told investors Tuesday that it plans to turn the tide by doing what it’s always done: improving service.
“Our plan is to re-accelerate our viewership and revenue growth by continuing to improve all aspects of Netflix — particularly the quality of our programming and recommendations that our members value most,” the company said.
The company added that it “doubles story development and creative excellence” and that it has introduced a “double thumbs up” tool that allows members “to express what they really love better than just liking.”
Netflix also said that when it comes to passwords, it will focus more on “how best to monetize sharing.”
“Sharing has probably helped fuel our growth by getting more people to use and enjoy Netflix. And we’ve always tried to make sharing within a member’s household easy with features like profiles and multiple streams,” the company said. “While these have been very popular, they have created confusion about when and how Netflix can be shared with other households.”
The company said last month that it had been working on ways over the past year to “allow members who share outside of their household to do so easily and securely, while also paying a little more.”
“While we won’t be able to monetize all of it right now, we believe it’s a great opportunity in the short to medium term,” they said.
Despite the dramatic slowdown in growth that calls its strategy into question, Netflix has remained defiant.
“This focus on continuous improvement has served us well over the past 25 years,” Netflix said. “That’s why we’re now the largest subscription streaming service in the world across all key metrics: paid memberships, engagement, revenue and profit.”