Analysts react to Netflix’s subscriber decline

After Netflix saw its subscriber base falling in a decade, analysts and industry insiders are saying that Netflix’s very model was not sustainable in the long term.

Tesla boss Elon Musk tweeted, “The woke mind virus is making Netflix unwatchable.”

“As I pour over the Netflix results today, this feels more like the beginning of the end for streaming’s first chapter than just a blip,” Cinedigm Chief Strategy Officer Erick Opeka wrote in a LinkedIn post.

“Netflix’s value proposition was simple in premise: massive amounts of eye-poppingly good original films and series, dropped all at once for binge watching, 100% ad-free for around 1/4 the price of a basic cable package. In order to provide this “simple” value prop, Netflix had to spend. And spend big. Last year, Netflix spent $9 billion on content to support this model for a single streaming service with 200 million subscribers. To put that in context, Paramount spent $8.6 billion to service 170 different channel properties, including Paramount+, which in aggregate reach 700 million cable & digital subscribers,” added Opeka.

“So, why does this feel like ‘the end of an era’?,” he asked, adding, “Because to me, this level of spending, along with the release model, feels a lot like the same subsidization that brought us ridiculously cheap Uber and Lyft rides, AirB&B’s, Bird scooter trips, Blue Apron meals, unlimited Moviepass movies, and a mountain of unused Groupon deals. Last year, the New York Times talked about VCs and cheap junk bonds fueling an unsustainable ‘millennial lifestyle economy’. Well, it wasn’t just millennials – it was all of us.”

Fast forward to today, he added, and those subsidies are quickly vanishing. Citing another example, he said, “An Uber to the airport during a surge will set you back by $100 bucks, Airbnb’s fees and surcharges add 30-50% to a booking, and many other companies I mentioned are dead or may as well be. I haven’t heard a Blue Apron ad on a podcast in years.”

“I am not saying Netflix is dead. But to compete with diversified, conservative models, the things we loved about Netflix will probably become a distant memory because debt-fueled growth subsidies are not sustainable. New release volume will need to drop, and the content mix will be dollar cost averaged down with more reality shows and less prestige dramas and movies. Binge drops will become less and less frequent. Prices will have to rise, or viewers will have to live with ads if they can’t afford the premium tier. And to quote a tweet I saw today, the new focus on password sharing makes today ‘a bad day for your ex brother-in-law’. Given that 56% of households earn less than $75k annually amidst 8% inflation, expect a lot of downgrades when they launch an ad-supported tier,” Opeka argued.

The thing that makes this painful as a consumer is that Netflix had a de facto monopoly for so long that this model seemed like our new birthright, he maintains. “And the studios, he adds, were so trapped in an innovator’s dilemma, they almost ceded the whole damn thing to Netflix. As someone who licensed a few hundred charter titles to a little experiment called ‘Netflix Watch Now’ in 2007, it dumbfounded me it took over a decade for a credible competitor to come on the scene. While Netflix is no longer the juggernaut it was, it is still a formidable platform. But we may see the budget-conscious Zazlovian model for streaming become the norm. Time will tell,” Opeka concluded.

Subscriber loss

Netflix’s subscriber growth is heavily dependent on emerging nations due to the penetration opportunity therein; they have already cut prices in India twice, which is now largely on par with other leading OTT platforms, noted Karan Taurani, Senior Analyst at Elara Capital. “Since these markets are price-sensitive, the only other route to grow is AVOD; the company has plans to introduce AVOD over medium term as we believe freemium model augurs well for emerging nations, including India, over the longer term,” he added.

In terms of India, he said, the AVOD market size is around $1.2 billion, of which almost 60% contribution is from aggregators (YouTube, MX) and sports-based OTTs. “Netflix foraying into AVOD will have a bigger negative impact for broadcaster-led OTTs rather than aggregator- and sports-based platforms,” he maintained.

According to Taurani, the decline in subscribers is primarily due to trend reversal and unlock, which would have led to reduction in consumption/ time spent on OTT.

“Account sharing (50% of the subs) and competitive intensity are the other two factors for the decline in subs. We believe a larger portion of the decline is due to low subs growth in emerging nations, as they are more price-sensitive and would have adopted to offline and other modes of entertainment; developed nations like the US, may not have seen a sharp decline as such, as the customer base is more sticky in nature with cable ARPU prices being very high. Competitive intensity growing and high level of penetration may be the only reasons for slower or no growth in the US market subs base,” he observed.

“In terms of the move towards ad revenue, we believe Netflix will move to a model wherein the premium content will offer advertisements in a very low key manner without impacting overall customer experience; this is typically similar to what a Disney + offers for the IPL/ premium cricket content. Time spent and audience traffic metrics on sports/ aggregator-based OTT’s is almost 1.5-3x that of broadcaster and other niche OTT platforms, which goes to prove the formers commanding position on AVOD; shift towards cricket and sports content will help Netflix compete better in the India AVOD market,” he added.

Monopoly

Some analysts blame Netflix for taking things for granted.

PP Foresight analyst Paolo Pescatore told BBC that Netflix’s subscriber loss was a reality check, “as it tries to balance retaining subscribers with raising its revenue”.

“While Netflix and other services were key in lockdown, users are now thinking twice about their purchasing behaviour based upon changing habits. North America especially is now awash with too many services chasing too few dollars,” he added.

Teresa Cottam, Chief Analyst at Omnisperience, told Advanced Television that it is not subscribers that are the problem, and added that Netflix is just bad at bundling, pricing and charging.

“The hubris of thinking you can put up prices, constrain customers with T&Cs they don’t agree with, and behave like you have a natural monopoly is staggering. Instead of trying to figure out how to stop households sharing their passwords with others, maybe they should consider how to make their pricing simpler, more customer-centric and more affordable? To be fair, part of this is outside Netflix’s control. The media market still hasn’t come up with a simple, global pricing structure because of the antiquated and labyrinthine rights system,” opined Cottam.