Reporter Tang Yitao
Edited by Gao Yulei
“Well,it’s a bi※ch!” As chairman and CEO of Netflix, Reed Hastings couldn't help but explode in his employee speech.
He's upset by the stock price. After releasing its first-quarter 2022 earnings report on Tuesday, Netflix's stock plunged 35 percent, wiping out $54 billion (about 352.7 billion yuan), or about 1.2 Tweets.
Netflix's stock price has changed since 2020| Image source: The New York Times
The reason is the decline in the number of users. Netflix has 200,000 fewer subscribers in Q1 this year than it did last year's Q4. In the financial report, it is expected that the number of global users will also decrease by 2 million in Q2 2022.
The last time Netflix fell, it was in 2011. At the time, Netflix was trying to break up the DVD mailing business and raise subscription prices. As a price, it lost 1 million users. Since then, Netflix has plunged into the streaming business and has made great strides, achieving double-digit growth in paying subscribers every year until last week.
In a letter to shareholders, Netflix attributed the loss of subscribers to slower growth in broadband and smart TVs, account sharing, and macro inflation. The more immediate cause was the war in Eastern Europe. Russia's invasion of Ukraine prompted Netflix to shut down its operations in Russia, costing them 700,000 subscribers.
The collapse in stock prices reflects a lack of confidence in the market. The 200,000 lost users accounted for only 0.2% of Netflix's global users, but this is the first time Netflix has lost users in 10 years. This is a signal that the era of Netflix's rapid growth may be gone. Or rather, the business model of its past is gradually failing.
As a streaming company with a cap of more than $300 billion (about 1.97 trillion yuan), Netflix's business model is surprisingly simple — producing quality content, attracting subscribers to subscribe, and revenue coming almost entirely from paid subscriptions. A streaming company usually has two main types of revenue, subscription revenue for paying users and advertising and promotion revenue. For example, in China's iQiyi, subscription revenue accounts for only about 50% of its total revenue. But for Netflix, its revenue growth depends almost entirely on subscriber growth. The other side of this sentence is that once the paid subscribers cannot continue to grow, the single business model of Netflix will usher in a crisis.
There is no doubt that Netflix is the streaming platform with the highest market share in the world. But the problem with the industry boss is that it will hit the user ceiling earlier, which is particularly fatal for a company like Netflix that relies heavily on user growth. Streaming platforms are essentially stealing pay-TV subscribers. In the U.S. market, for example, pay-TV subscribers have declined year on year since they peaked at 101 million in 2011. At present, Netflix users in North America are 74.58 million, which means that more than half of potential users have already paid for Netflix.
The lack of growth has forced Netflix to change its content production strategy. A person familiar with the matter told the Wall Street Journal that Netflix is considering prioritizing the projects with the highest returns over the most impact. Bela Bajaria, head of Netflix's global TV business, corroborated this in a recent interview: "We should adjust our budgets according to creative requirements and audience size. ”
When Netflix first started making original programming, it had to make high-cost productions like House of Cards to earn the market. This is a typical characteristic of enterprises in the period of high-speed growth, to burn money for scale. But right now, Netflix is more pro-loi works like Squid Games.
Last year, Squid Games exploded around the world. The tv series cost only $21.4 million (about 140 million yuan) to produce, but it created nearly $900 million (about 5.9 billion yuan) worth of value| Image: Netflix
In addition, Netflix is trying to squeeze more profits out of the home sharing service. The so-called family sharing means that Netflix allows each account to be shared by up to 5 family members.
In Hastings' view, it was home sharing that pulled down Netflix's growth. Netflix estimates that of its 222 million paid accounts, 100 million are using home sharing services. It is worth noting that these 5 sharers must be "real" family members of the user, and sharing with friends or even strangers is not allowed by Netflix. But in the high-speed development period, Netflix did not strictly ban this behavior — it is a means to help expand the size of the market. But for now, it's becoming an urgent problem to be solved, or a potential growth point.
Currently, Netflix is testing a paid model in Chile, Peru and Costa Rica, where existing accounts can add two additional users outside of family members for about $3 (about 20 yuan) a month.
That might really bring some extra revenue to Netflix. According to eMarketer, about 611 million viewers worldwide watched Netflix at least once a month last year, nearly three times the company's actual paid account.
However, investment bank KeyBanc Capital also pointed out the risks of doing so. A survey they conducted last month found that password sharing is most prevalent among 18- and 29-year-olds. People in this age group tend to have a lot of other viewing options, "which can eventually lead to these consumers stopping watching Netflix altogether." Analysts at KeyBanc Capital said.
Compared with competitors, Netflix's subscription price is always the most expensive one| Image source: Statista
While Netflix has always had an edge in the competition from the streaming business, that lead is shrinking. Over the past few years, HBO MAX, Disney+, Amazon Prime Video, HULU, PARAMOUNT+, and Netflix's competitors have been eating into its share. Compared to Q1 2020, Netflix lost nearly more than 10% of its original content market share in Q4 2021.
Netflix's original content market share is being eroded by other giants| Image source: senalnews
These competitors steal not just Netflix's subscribers, but its content. In the past, Hollywood has given Netflix a lot of old TV shows and movies. They think not many people will pay to see these things on the internet, and they are wrong. HBO took back the rights to Friends, The Big Bang Theory, Studio Ghibli and other works. Because of the launch of Disney+, Netflix removed a series of Disney IP content. The veteran sitcom "The Office" was also taken back by NBC.
Currently, Netflix has a 25% share of the U.S. streaming market. Analyst firm GlobalData predicts that number will drop to 16 percent by 2026.
The bad situation has forced Netflix to start abandoning some of the principles it has insisted on, such as not advertising. Two years ago, Hastings also said he wanted Netflix to be "a safe place to rest." There, you can explore, get stimulating, enjoy, relax, and there won't be any controversy about exploiting users with ads. ”
Now, Netflix is planning a new subscription plan in the future, where users can subscribe at a lower price, but at the cost of having to accept ads. "I'm true to consumer choice and [should] allow consumers who want lower prices and more ad-tolerant to get what they want." Hastings said in a post-meeting interview last Tuesday.
At the conference, advertisers asked a lot of questions about the ad experience, such as whether the ad would air before the show started or would it be broadcast throughout the show; how often it would be broadcast; whether the ad would appear in all the content or just part of it.
Hastings barely responded to any details, but he mentioned Hulu: "I think it's obvious that it (the ads) work well at Hulu. ”
Hulu has been Netflix's main competitor for the past decade or so, and the first streaming company to explore advertising models. Analysts at Morgan Stanley estimate that Hulu generates more than $3 billion in advertising revenue. They expect Netflix to generate billions of dollars in advertising revenue over the long term.
It seems like a win-win model, with Netflix getting extra advertising revenue and advertisers getting exposure. Did anyone get hurt? Netflix's core users.
Once the advertising model is introduced, Netflix must weigh between consumers and advertisers, who is its real user. Essentially, the interests of consumers and advertisers are mutually exclusive. Because the advertising model is a attention business, the consumer is the product produced by this model.
In front of Netflix, it is actually the old road that the domestic long video platform has waded through - revenue does not meet expectations, increases advertising intensity, user experience is damaged, consumers are lost, and revenue is less than expected... This creates a vicious circle.
For Netflix, the current situation is a dilemma. The effective business model of the past decade or so has encountered bottlenecks, and the prospect of new profit directions is still unclear.
But what is certain is that Netflix's streaming myth is shattered. What the company has been preaching, and what its core users believe, has changed subtly since last Tuesday's earnings report. In the words of Twitter user @oldschmitty: "Netflix isn't cool anymore." "This is probably the long-term damage that the decline in stock prices has caused to the brand."