Author | Chen Chen
Edit | Zheng Xuan
The impact of the Russian-Ukrainian conflict on the Internet giants in Europe and the United States began to appear, and Netflix became the first domino to fall.
On April 19, local time, Netflix released its first quarter 2022 financial report. Following last quarter's "avalanche", the situation has become more serious this season.
According to the earnings report, Netflix's first-quarter revenue was $7.87 billion, up 9.8% year-on-year, lower than expected at $7.93 billion; net profit fell 6.4% to $1.6 billion. More notably, Netflix's paid subscribers decreased by 200,000 in the first quarter, which is also the first time since 2011 that Netflix's subscribers have negative growth. Netflix expects user churn to continue, with a decrease of 2 million paid subscribers worldwide in the second quarter of 2022.
Affected by disastrous earnings performance, Netflix shares plunged more than 25% in after-hours trading, and Netflix fell more than $38 billion in hours based on its market capitalization of $155 billion at the close of the previous trading day. Market concerns about the same type of business companies have intensified, streaming media stocks have also been affected by Netflix, and roku, Disney, FuboTVz stock prices have fallen in after-hours trading.
"I know that this quarter's results have disappointed investors a bit, that's a certainty," Reed Hastings, Netflix's co-chief executive, admitted on a conference call, "and our user growth hasn't met expectations."
Netflix co-CEO Reed Hastings
Netflix's judgment of macroeconomic factors and competitive situation three months ago was not accurate enough. Bloomberg reviewed Netflix's past data analysis and said that if Netflix's stock price continues to close lower on Wednesday, Eastern Time, it means that the company's fifth consecutive quarter of earnings release will have a negative effect on the stock price.
01 Negative growth in subscribers, only because of the Russian-Ukrainian conflict?
In the first quarter of 2022, Netflix's revenue, profit, subscribers and other key financial indicators were less than expected. But there is no doubt that in a string of bad data, user growth was a direct factor in the sharp decline in stock prices.
The Russian-Ukrainian conflict is one of the direct causes of the loss of Netflix subscribers this season. Affected by the Russian-Ukrainian conflict, Netflix suspended its services in Russia and gradually ended all Russian paid membership business. Netflix focused on explaining in its earnings report that this move led to a net decrease of 700,000 Netflix paid users. Not long ago, in response to Netflix's withdrawal, Russian users launched a class action lawsuit demanding 60 million rubles in compensation for Netflix.
Netflix said that excluding this factor, Netflix achieved a net increase of 500,000 global paid subscribers in the first quarter. But even excluding the impact of the Russian-Ukrainian conflict, Netflix's performance in the first quarter of 2022 fell far short of market expectations. Before the earnings report, the market expected Netflix to increase subscribers by 2.5 million in the first quarter, and it is clear that Netflix is experiencing more than just geopolitics.
In the earnings meeting, Netflix also mentioned the reasons for the slowdown in growth, one of which is the fading of the "dividend" of the epidemic.
Affected by the epidemic in 2020, offline entertainment was suspended, online streaming media platforms ate the epidemic dividend, and the number of annual net paid members of Netflix in 2020 increased by 31% year-on-year, which is also the fastest growing cycle of Netflix in five years.
The epidemic in 2020 has allowed Netflix to speed up the "harvesting" of potential paying users, but it has also made Netflix gradually reach the user ceiling. Coupled with the relaxation of control of the epidemic in Europe and the United States, the pull effect of the "home" economy for streaming media has weakened significantly.
Netflix stock price movements
In addition, under the situation of global economic tension and severe inflation, consumers have to cut unnecessary expenses in order to cope with the continuous soaring cost of living, the first of which is paid video subscriptions. Among them, Netflix has been most significantly affected in Europe and the United States, where inflation is most severe.
According to CNN, data from media consultancy Kantar shows that in the first three months of this year, British consumers cancelled about 1.5 million video subscription accounts, including Netflix, Disney+ and Apple TV. By household, the number of UK households that purchased at least one paid subscription in the first quarter of this year fell by 215,000. Meanwhile, about 38 percent of respondents said they plan to unsubscribe from their paid video accounts within the next three months.
In the earnings meeting, Netflix also said that some markets, including Latin America, have also caused a certain number of user losses due to the impact of macroeconomic conditions.
In addition to macro factors such as the Russian-Ukrainian conflict, the recession of the home economy dividend, and global inflation mentioned by Netflix at the earnings report, the price increase of Netflix in North America, its base camp, in the first quarter of this year, is also one of the factors that led to the slowdown in the growth of Netflix users.
On January 14 this year, on the eve of the release of the fourth quarter of 2021 earnings, Netflix announced that it will raise prices in North America. Subscription prices in the U.S. and Canada will rise by $1-$2 per month. The price increase led to a year-over-year increase in overall revenue in North America (from $3.17 million to $3.35 million), but it also led to the loss of 600,000 users.
In addition, the streaming red sea is a long-term dilemma faced by Netflix. "Competitors also often launch very good series and movies," Reed recalled on a conference call about the increasing competition in streaming. As a leader in the streaming space, Netflix's position is being challenged.
The data shows that Netflix's content market share in the fourth quarter of 2021 was 46.6%, a significant decline from 2020. At the same time as Netflix's growth slowed down, Apple's Apple TV and Amazon's Amozon Prime Video began to seize the market of Netflix, and streaming media of established film platforms such as Disney and HBO quickly joined the battle. In the first quarter of this year, Disney+'s streaming service grew 11.8 million subscribers, while Paramount, which did not officially launch its streaming service until June 2021, already had 56 million users.
02 growth is not enough, raise prices to make up
In response to concerns about revenue growth and profit growth caused by the slowdown in user growth, Netflix proposed three solutions on the earnings call.
The first is to solve the problem of sharing accounts. Netflix said that there are more than 30 million household sharing accounts in the United States and Canada, and this data has expanded to 100 million worldwide. And this part of the "white prostitution" users, so that Netflix loses up to $9 billion per year.
Prior to this, a Netflix master account could be shared by multiple people (usually 5 people), and each person could add a to-see list, movie watching record, etc. to their own sub-account. Earlier this year, Netflix began testing additional fees for shared accounts in Chile, Costa Rica and Peru, which may be expanded to those outside the home that share passwords.
"If you have a sister who shares your Netflix account with you in other cities to watch platform content, that's fine, and we won't turn off the service, but we may ask you to pay a little more so your family can continue to use our service."
Netflix's "carpooling" on Douban
Netflix said it will make efforts to improve the level of commercial monetization of users who have not yet paid, "this is something we have been thinking about for the past one or two years, but due to the rapid development of our business, it was not the focus of our work in the past, but now we need to work very hard to achieve this progress."
Netflix did not disclose when this action will be launched globally, but from the external statement of Netflix's senior management, it can be predicted that the time for the "hammer" to fall will not be too far away.
Although executives are looking forward to the release of this part of the payment potential, there is no data to show the likely outcome of this initiative, and it is unknown whether users will pay extra for sharing accounts.
In addition to looking for the possibility of increasing revenue from non-paying users, another initiative of Netflix is to increase the unit price of customers.
According to Tianxia Finance, in early March, Netflix announced an increase in subscription prices in the United Kingdom and Ireland, and the basic subscription fee rose to 7 pounds per month, about 60 yuan per month. If users want high-quality 4K and HRD, the cost is £16 per month, or about RMB 133.
Previously, Netflix has also had many price increases, but the price increase has caused further loss of users, and Netflix has to prevent it.
In July 2011, Netflix split the original 10-dollar DVD + streaming packaging service (about 5 US dollars each) into 8 US dollars per single service (a total of 16 US dollars), due to no prior communication with users and excessive price increases, by the end of September 2011, Netflix lost 800,000 users.
In 2016, Netflix raised the cost of $7.99 for old members to the same $9.99 as new members, and even though the $9.99 membership fee for new users had been in place for two years, a large number of old users still canceled their subscriptions, and the company's after-hours stock price plummeted by 16%. Having learned the lessons of the past, Netflix's price increases after that are more cautious.
It is not realistic for subscription prices to remain at the same level due to factors such as rising costs and inflation, but in today's context of fierce streaming competition and economic contraction, how to balance user experience and company revenue is even more difficult.
As a result of the latest price increase, the loss of 600,000 users in North America in January this year has given a worrying signal. This time, Netflix will expand the scope of price increases to the United Kingdom and Ireland, and in the environment of inflation and rising cost of living, it is likely to encounter negative user growth in these regions again.
Neither charging for shared accounts nor raising unit prices seems to be enough to fundamentally solve Netflix's problems. So Netflix also came up with a new solution this quarter – advertising.
Reed Hastings said Tuesday that Netflix is now considering introducing lower-priced subscriptions to users who are not sensitive to ads, in short, users may receive ads even if they pay to watch the content.
For a long time, Netflix, which is mainly based on subscription payment, has not added ads or other promotions to the platform, which has also allowed Netflix to get a lot of praise among users.
"Those who follow Netflix know that I've always been against complex advertising and very much like simple subscriptions." But it's clearly time for Netflix to rethink its business model, "as much as I like that, I prefer the choice of consumers who want lower prices and aren't sensitive to advertising to get what they want."
*Head image source: Netflix movie "The Forgotten Battle"
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