Netflix lost subscribers in the first quarter of 2022 for the first time in over a decade, but predicted it would lose another 2 million by June thanks to its crackdown on password sharing. And Wall Street ran screaming. According to CNBC, Netflix’s stock plummeted 35%, depreciating the brand by $50 billion.
What’s really to blame for the Netflix exodus? Everyone has an opinion: Skyrocketing subscription costs, weak programming, the bursting pandemic bubble that kept people at home and on screens for two years, or the “wake-mind virus” like some supposed genius recommended.
Aside from the idiot hot attitude of Twitter’s would-be owner, most of these theories have at least some merit. But pundits like tech analyst Carmi Levy have seen the writing on the wall for years and say “Netflix leadership should have seen this coming, too.”
“During the company’s salad days of uninterrupted double-digit subscriber growth, it ignored creeping structural issues like credential reuse, dissatisfaction with release schedules, licensing restrictions in certain countries, among others,” says Levy.
“It was lulled into a false sense of security as the steady growth masked the underlying challenges the company faces.
The Netflix formula is broken
Before tech journalism, I worked in book publishing, where most books either made a steady income or barely got their author advances back. But publishers don’t care much about these books because they’re desperate for the “next Harry Potter” that will fund their business for years to come. So when book sales don’t explode — even if they get rave reviews — publishers write off new authors after three books and invest in the next potential golden goose.
I mention this because Netflix follows the exact same pattern with its streaming library. It’s throwing new Netflix Originals at the wall every week, desperately hoping they’ll be the next Squid Game or Stranger Things.
If a show doesn’t hit screens immediately, Netflix will publicly cancel it within a week – when most other streaming platforms would drip out a second episode and try to raise awareness through word of mouth.
If a show is successful, it gets a second or third season, but at that point it won’t even salvage popularity because that’s the point where production costs and actors’ salaries skyrocket, and Netflix would rather they do just start a new season – Get beat for less and chase new subscribers.
Why invest in a Netflix show when you know it will last two seasons at most?
“By failing to allow successful content to breathe and grow and to dig deeper roots with viewers, Netflix is increasingly vulnerable to churn as subscribers try – and fail – to connect with trusted content over the long term,” says Levy.
Simply put, why would you invest in a Netflix show when you know that 90% of the time it will last 10-30 episodes?
(Image credit: Android Central)
When Netflix went from DVD rentals to streaming, people came for House of Cards and Orange Is the New Black, but they stayed to booze The Office and Friends while cable TV kept you waiting weekly. It helped Netflix grow to its massive 220 million subscriber base.
But this formula doesn’t work now. People have a variety of other streaming options from networks, most of which hoard and provide their own syndicated content while keeping things fresh with weekly schedule TV. This left Netflix dependent on its Flash-in-the-Pan shows.
And when people talk about the best Netflix shows, the first question is either “What episode are you in?” or “Are you done?” because the app throws every episode at you at once. Nobody tweets about it for fear of raising spoiler ire, and then people move on. Not exactly an organic way to build a following.
Anecdotally, I certainly don’t have the time or bandwidth to sit down and do a season of TV every week or two. An hour or two per show per week is perfect. And if I did, I wouldn’t remember the same amount of detail when it came time for water cooler buzz. “That was good, yes”April 21, 2022
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“An all-in-one release creates headlines and engagement as viewers rush to see the latest and greatest,” Levy pointed out. But “relying too heavily on these types of releases makes it harder for subscribers to create regular engagement schedules that would tie them more closely to the platform over time.”
It made more impact with Netflix original movies because people can reasonably quickly watch and discuss them. But they also don’t hold people’s attention nearly as long as even a mediocre show.
“Netflix needs to experiment with a more diverse mix of publishing strategies to ensure it appeals to a broader mass of consumers…[and] stay at the top of their favorite streamers list,” says Levy.
Password sharing built Netflix and is tearing it down
(Image credit: Android Central)
I’m curious how many people actually pay for more than a few streaming services at once. In my personal bubble, various family members and friends pay and share Netflix, Paramount+, the Hulu/Disney+ Bundle, Apple TV+, and HBO Max. And I bet most family or friend circles have their own arrangements.
When you add up the total cost of everything, you’re basically paying for a cable package that should replace streaming. This is why I believe the video streaming industry is built around password sharing.
It lets people pay what they can afford without missing the show of the moment. It lets Netflix subsidize its higher fees because subscribers rely on others to pay for the other, cheaper services. And it ensures that even if people get bored of Netflix, they don’t cancel because other people are using the same account.
Netflix knew about password sharing; In 2017, it even tweeted that “love shares a password.” According to Fortune, sharing passwords costs Netflix $6 billion a year and the global streaming industry $25 billion a year. but “leadership inertia” amid years of record-breaking profits meant executives could continue to ignore the issue to keep users happy.
(Image credit: Android Central)
Now that growth has flattened, executives or their shareholders want to claim the lost revenue. But waiting until now to “fix” the problem instead of recouping losses during big growth streaks years ago was short-sighted.
More importantly, in my opinion at least, the streaming system could collapse like a house of cards if companies start restricting or geoblocking accounts, since nobody wants to pay for every streaming app themselves. Netflix won’t mind if it’s the one service people keep while giving up the rest — but that’s not certain these days.
Netflix is currently testing out-of-home fees in countries like Chile and Peru for up to two additional users for a few dollars each. This would limit excessive sharing and make a subscription quite expensive for the main user, making them less likely to offer to share with friends in the future.
Assuming it makes this system global, it might be a less painful fix than banning sharing outright. But Netflix has gone up in price several times; Paying even more for friends — or Netflix banning people from watching it on vacation to share paranoia — will only result in another exodus and loss of goodwill.
Netflix could try to claim kicked users as new subscribers. But that depends on whether people used to ad-free freeloading are willing to pay for a cheaper ad-supported subscription instead.
Can Netflix fix the ship?
Netflix’s current plan is to add a lower-priced, ad-supported tier so people forced out of joint accounts have a cheaper option to keep access, and new subscribers see a lower cost of entry. Will it work?
Levy believes Netflix “can no longer afford to increase its tariffs on a regular basis” and that a cheap ad-supported tier could “reduce the company’s exclusive reliance on subscriber revenue, which could lessen the pressure to increase subscriber tariffs more broadly.”
In theory, it’s a win for everyone. In practice, the streaming giant will have to be very cautious about selling the idea, as it’s likely to be unpopular with longtime users and “Netflix can’t afford to pass up on this given the current stock woes.”
(Image credit: Netflix)
Netflix also invests heavily in games, making mobile games free to subscribers and acquiring exclusives like a League of Legends spinoff. But game development takes years to come to fruition, and by the time a hypothetical connection game is ready, Netflix may already have dropped it!
Other mobile gaming platforms like Play Pass and Apple Arcade are much cheaper standalone offerings with hundreds of games, something Netflix can’t match on its own. I’m sure its subscribers won’t mind getting access to games, but it will take a lot of investment and time that the company may not have – while other companies offer it more effortlessly.
That’s really the problem for Netflix in many ways. It made a splash as the first major streaming service, but it can’t match the decades-long lag of competing services like Peacock, Disney+, and Paramount+; or the ability to bundle its subscription with other products like Apple TV+ and Prime Video.
No matter what streaming device you own, you’ll find plenty of other content to watch.
So Netflix can only release original content in a frenzy. Besides making it impossible for most people to watch all Netflix releases, they’re building up a huge backlog. Then Netflix abandons the shows we don’t watch right away, causing us to watch nothing but old favorites that we know have satisfying endings. So we’re canceling our Netflix subscriptions. It’s a predictable cycle, but I’m not sure how Netflix will break it.
“It would be naïve to think that the company will ever return to the halcyon days of owning the streaming market and relying on consistent growth to mask any underlying flaws in its business model,” says Levy.
But he pointed to Netflix’s DVD-to-streaming pivot and suggested that “the mid-stream change of direction is literally burned into this company’s DNA and it would be premature to suggest it can’t flip again when the traditional.” streaming market matures”.