Wall Street had low expectations this quarter, as total memberships fell to 221.64 million. To address declining growth, executives at the streaming giant say they're exploring an ad-supported tier.
Netflix lost 200,000 subscribers during its most recent quarter — a major setback for the streaming giant that has seen exponential user growth over the past decade — as the company disclosed that it fell far short of its own low expectations of 2.5 million subscriber adds for the start of 2022.
The streaming giant lost subscribers in nearly every region except for the Asia Pacific market, where it saw a net add of over 1 million subscribers. Netflix lost around 640,000 subscribers in the U.S./Canada region during the first quarter — a larger drop than its previous subscriber loss in the region last year — and saw a 300,000 subscriber loss in Europe, the Middle East and Africa and 350,000 loss in Latin America. The losses are expected to continue into Q2, when Netflix predicts it will lose an additional 2 million subscribers.
During a prerecorded interview, Netflix co-CEO Reed Hastings said the streamer will explore launching an ad-supported tier over the “next year or two” — a move that Netflix executives have previously spoken out against. “Those who have followed Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscription. But as much as I’m a fan of that, I’m a bigger fan of consumer choice and allowing consumers who would like to have a lower price, and are advertising tolerant, to get what they want makes a lot of sense,” Hastings said. “Think of us as quite open to offering even lower prices with advertising as a consumer choice.”
The streamer will also be “pulling back” some of its spending over the next two years to increase its revenue growth, according to CFO Spencer Neumann. “We’re pulling back on some of our spend growth across both content and non-content spend,” Neumann said during the prerecorded interview. “We’re trying to be smart about it and prudent in terms of pulling back on some of that spend growth to reflect the realities of the revenue growth of the business.”
Heading into Tuesday, when Netflix reported its earnings, Wall Street already had low expectations for the streaming giant due to the company’s weak performance in Q4 and its muted forecasts for the first quarter. Subscriber additions were also expected to be impacted by Netflix’s decision to suspend its service in Russia, where the streamer said it had around 700,000 subscribers, over the invasion of Ukraine. Not accounting for the losses in Russia, Netflix said in its shareholder letter that the streamer would have added 500,000 subscribers for the first quarter.
Netflix previously attributed its low subscriber expectations to a “back-end weighted content slate,” since the second season of Bridgerton and The Adam Project were released in March. Last quarter, the streamer also said in a letter to investors that “added competition” from rival streaming services “may be affecting [Netflix’s] marginal growth some,” though the company said it has seen continued growth in regions where other competing streamers have launched.
But with the weak performance in Q1, Netflix said its slowdown in growth was due to a variety of factors, including account sharing, continued disruption caused by the pandemic and, again, increased competition from rival streamers. In its shareholder letter on Tuesday, Netflix said that of its roughly 222 million paid subscriptions, more than 100 million were being shared with users outside of paying households, with 30 million shared accounts happening in the U.S./Canada region alone.
To address the problem of account sharing, Netflix began testing a new feature in March to monetize password sharing as another means to boost revenue as subscriber additions have stalled. The feature, unveiled in Chile, Costa Rica and Peru, charges primary account holders a small fee to add two users outside of their households onto their accounts, though it’s not immediately clear what kind of impact on revenue the test has led to thus far. Netflix has not yet rolled out the feature globally, though it appears that a widespread password crackdown may be imminent given its impact on Netflix’s growth.
To help address dwindling growth, Netflix continued its expansion into games during the quarter with the March acquisitions of Texas’ Boss Fight Entertainment and Finland’s Next Games, the latter of which created the Stranger Things puzzle game. The Next Games acquisition is expected to close in the second half of 2022.
The last time Netflix reported a subscriber loss, in late 2011, it spurred activist investor Carl Icahn to launch a hostile takeover effort. Netflix responded by instituting a poison pill to keep Icahn’s stake below 10 percent. Icahn would exit the company in 2015, making a $2 billion profit, though by selling so early, he missed out on $40 billion in gains as streaming video accelerated.
While Netflix’s bullishness on streaming video a decade ago was clearly warranted, the slowdown the company is seeing now could force investors and other entertainment companies to reevaluate the global market opportunity.
April 19, 1:15 p.m. Updated story to reflect that Netflix lost 200,000 subscribers in its latest quarter.