Netflix’s share price plunges more than 36% after its dismal quarter earnings were released on 20th April 22, where it reported a net loss of 200,000 subscribers. The once-mighty FAANG stock has dropped almost 70% of its share price since the all-time high of USD700.99 less than 6 months ago.
What Are The Reasons Growth Is Slowing At Netflix?
So, what are the reasons that cause Netflix to lose subscribers of such alarming magnitude?
Reason 1: Price Hike At The Wrong Time
Netflix cited the negative subscriber growth for a number of reasons, one was the price hike in January (first in 2 years) in the US, UK and Canada came at the wrong time as the war in Ukraine led to oil price spiking and soon everything else became expensive. So, people started cutting down on luxuries to cope with the increased cost of living. There were 1.51 million canceled subscriptions between January and March in the UK alone.
Reason 2: Pulling Out Of Russia
The second reason was due to Netflix exiting Russia, which caused a loss of 700,000 subscribers, without which, Netflix would see a growth of 500,000 subscribers. Compared to the previous quarter (2021 Q4) of 8.5M subscribers, the negative growth is a disaster. To make matters worse, the management is expecting to lose 2M subscribers in the next quarter.
Reason 3: Increasing Competition
Netflix also cited increased competition from other streaming players such as Disney+, Amazone Prime Video, Apple TV, HBO Max, Hulu and YouTube for the slowdown in growth.
Reason 4: Account Sharing
Netflix said 100 million people (more than 45% of its total 220 million subscribers) are watching its videos through shared passwords and it wants to monetize this viewership. Last month, the streaming platform announced that users in Chile, Costa Rica, and Peru would need to pay extra for sharing accounts between households. It is believed that the same strategy could eventually be applied to every other market, including India. Many users are not happy and have decided to terminate Netflix or move to different platforms
Reason 5: End Of Pandemic
Netflix had a great pandemic as people were locked up in their homes and had nowhere to go. So, everyone flocked to Netflix. In the very first month of the lockdown, Netflix added some 16 million subscribers and by the end of 2020, the number was 36 million.
However, as the world moves towards endemic in 2022, it is finally opening up and people no longer need to be glued to the television sets when there are other places of entertainment and sources of leisure. Gyms and theaters have reopened and clubs are now welcoming members all over again. People can now afford to log out and step out which is bad for Netflix.
Why I Believe Netflix Still Has A Chance To survive the apocalypse?
With the many reasons above of Netflix going downhill, why do I think that Netflix still has a chance of getting out of the current mess?
Reason 1: Lifestyle
Netflix has integrated into the lives of many, especially their current pool of subscribers. Take for example, I watch Netflix and YouTube whenever I am doing the boring stuff such as dishwashing. There are people watching Netflix when they are having their meals or use it as a form of relaxation at night after a long day at work. Some consumers simply binge watch the addictive series and find great joy in doing so.
Taking Netflix out of the usual routines will disrupt their lives. Something has to come in to fill the void for Netflix consumption during boring chores, meal times, relaxation times or couple time. Of course, consumers can choose other platforms, such as watch more YouTube free videos, or switch to Disney+ or Apple TV. However, this brings us to the second reason of why Netflix is unique and can fend off competition and be irreplaceable in the lifestyles of its subscribers.
Reason 2: Content & Competition
Last year, Netflix spent around 13 billion dollars on original content. I am pretty sure we have watched at least one of them. The reason why Netflix’s share price can hit all-time high price of USD700 is because of the phenomenal success of Squid Game, which reportedly helped Netflix earned almost 1 billion dollars.
Netflix is able to stream original movies from other streaming platform such as Disney and HBO, notably the MCU franchise and DC comic franchise. However, the other platforms are not able to stream Netflix originals such as Money Heist, Squid Game or Bridgerton. This gives Netflix an advantage of being able to have a huge variety of shows and original content on its platform.
Content is king and it will ultimately be the trump card to retain existing subscribers, woo back those have left temporarily or to attract new subscribers. In today’s age, reviews of good content will spread like wild fire on its own on social media.
Reason 3: Recession
I do not quite buy into the narrative that consumers are canceling Netflix subscription because they feel Netflix is a luxury. I believe that going to the movies cost much more than paying for Netflix subscription. With the current price tier, consumer can either watch one or two movies per month at the theaters or watch unlimited movies and drama series at the comfort and convenience of their homes.
Therefore, if consumers are cutting down on their costs of living, Netflix will be a good way to help them save up on their entertainment spending. The world may have open up and travel resumed, but some interests are not sustainable for the long run, i.e. you can’t travel every month for leisure, unless you are a happily retired rich man. So, in this aspect, I think Netflix’s position is only threatened if there is a streaming platform that offers the same level of good content as Netflix, at a cheaper price or for free.
Reason 4: History & Evolution
Did you know that Netflix started in 1997 as a company selling and renting DVD? In 2007, they changed the business model to video streaming business as DVD rental is on a decline. The management is able to innovate and create new business models to take the company to a new level. Netflix’s co-founder, Reeds Hasting, is still the co-CEO today. He brings a wealth of experience in leading through difficult times and to keep innovating the company. Netflix is venturing into gaming, cheaper ad-supported plans and eliminating account sharing among different households, in an attempt to generate more revenue for the company.
Reason 5: Asia
As of December 31, 2021, Netflix had over 221.8 million subscribers worldwide, including 75.2 million in the United States and Canada, 74.0 million in Europe, Middle East and Africa, 39.9 million in Laine America and 32.7 million in Asia-Pacific. Asia has a population of 3.13 billion people (not including China and North Korea) and based on the current numbers, Netflix has only captured 1% of the population in Asia, as compared to 21% for United States and Canada.
Netflix’s hugely successful Korean drama series, “Squid Game” and “All Of Us Are Dead”, has helped the company make good progress and grow in a variety of markets including Japan, India, Philippines, Thailand, and Taiwan. Netflix’s investments in Japanese anime are also garnering a global audience, with over half of the platform’s subscribers watching anime in 2021.
Concluding Thoughts
I remembered some time last year, Netflix share price was moving sideways due to the growing competition and the emergence of Disney plus. However, the record breaking “Squid Game” series to brought investor confidence back to Netflix.
I do not own any Netflix shares but I do have 16 LEAPS CALL option contracts (8 of which was bought recently when the share price dropped 35%) expiring in Jan 2024. My total costs in these contracts add up to SGD14.13k, which made up 3.27% of my total LEAPS Portfolio funds allocation.
I still believe in the Netflix fairy tale story. Now I will wait patiently for them to revive and rise from the ashes again.
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