Netflix loses 200,000 subs in first 3 months of 2022; mulls ad-supported version

For the first time in ten years, Netflix has seen its subscriber number falling. The streaming giant lost 200,000 members in the first three months of 2022, the company said in its Q1 2022 financial results. The churn happened following the price hike in some of its important markets such as the UK and the US.

A number of reasons have been attributed to the decline in subscribers, such as the increased competition, password-sharing by its subscribers, and the Russian invasion of Ukraine.

Wall Street saw Netflix’s shares tumbling 26% after the bell on Tuesday (April 19, 2022).

Ad supported version

Netflix Co-CEO Reed Hastings hinted at the possibility of an ad-supported tier. He said at the company’s earnings conference call that “it is pretty clear that it is working for Hulu, Disney is doing it, HBO did it. We don’t have any doubt that it works.”

“Those who have followed Netflix know that I have been against the complexity of advertising and have been a big fan of the simplicity of subscription. But as much as I am a fan of that, I am 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," he said.

“In terms of the profit potential, definitely the online ad market has advanced, and now you don’t have to incorporate all the information about people that you used to. We can stay out of that, and really be focused on our members, creating that great experience” Hastings said.

Falling revenue growth

Netflix is mulling over cracking down on account-sharing as it pushes to sign up new members. In a letter to shareholders, the streamer said that its revenue growth has slowed considerably.

“Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds,” said the streamer.

According to the letter, the big COVID boost to streaming obscured the picture until recently. “While we work to reaccelerate our revenue growth – through improvements to our service and more effective monetization of multi-household sharing - we’ll be holding our operating margin at around 20%. Key to our success has been our ability to create amazing entertainment from all around the world, present it in highly personalised ways, and win more viewing than our competitors. These are Netflix’s core strengths and competitive advantages. Together with our strong profitability, we believe we have the foundation from which we can both significantly improve, and better monetise, our service longer term,” Netflix said in the letter.

The streamer informed the shareholders that since launching streaming in 2007, it has operated under the firm belief that internet-delivered, on demand entertainment will supplant linear TV, and that this transition represents a once-in-a-generation opportunity to build a highly popular and profitable entertainment company.

“People love movies, TV shows and games; broadband and smart TV penetration continue to grow globally with more and more connected devices; and while hundreds of millions of homes pay for Netflix, well over half of the world’s broadband homes don’t yet, representing huge future growth potential,” the letter says.

In the near term though, says the streamer, it is not growing revenue as fast as it would like. COVID clouded the picture by significantly increasing its growth in 2020, “leading us to believe that most of our slowing growth in 2021 was due to the COVID pull forward. Now, we believe there are four main inter-related factors at work.”

Hinting at the perils of account-sharing, the streamer said that in addition to its 222 million paying households, it estimates that Netflix is being shared with over 100 million additional households, including over 30 million in the UCAN region.

“Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth,” says the letter.

The third factor for the subscriber decline, according to Netflix, is competition. The competition for viewing with linear TV as well as YouTube, Amazon, and Hulu has been robust for the last 15 years. “However, over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched. While our US television viewing share, for example, has been steady to up according to Nielsen, we want to grow that share faster. Higher view share is an indicator of higher satisfaction, which supports higher retention and revenue,” it said.

Future growth

The streamer says that its plan is to reaccelerate its viewing and revenue growth by continuing to improve all aspects of Netflix - in particular the quality of its programming and recommendations, which is what it members value most.

“On the content side, we’re doubling down on story development and creative excellence, which we see reflected in big Q1’22 TV hits like ‘Bridgerton’ (627m hours viewed for Season 2, our biggest English language series in our history) and ‘Inventing Anna’ (512m hours viewed) – both from our extremely successful partnership with Shonda Rhimes – and films like ‘Tinder Swindler; (166m hours viewed, our biggest documentary film ever released) and ‘The Adam Project’ (233m hours viewed), which come on the back of our Q4 hits Red Notice and Don’t Look Up. On the product side, we recently launched “double thumbs up” so members can better express what they truly love versus simply like - enabling us to continue to improve our personalised recommendations and overall experience,” says the streamer.

Over the longer term, much of its growth will come from outside the US, says the streamer. “Traditionally, US entertainment companies have viewed “international” as an export market for US content. But we saw long ago that great stories can be made anywhere and loved everywhere - dramatically broadening the pool of creators with whom we can work, increasing the variety of our programming and better serving local tastes. To support this, we’ve been building out capabilities like creative development, personalisation, and language presentation/ localisation,” it says.

Netflix is now producing films and TV in more than 50 countries with a high degree of integration in the local entertainment ecosystem resulting in the creation of blockbusters from every region. In fact, three out of our six most popular TV seasons of all time are non-English language titles: ‘Squid Game’, ‘La Casa de Papel Part 4’ and ‘All Of Us Are Dead’, which launched in Q1’22 and has accumulated 561m hours viewed in its first four weeks.

The streamer says that its goal is to sustain double digit revenue growth, increase operating income even faster (as it expands margins) and generate growing positive free cash flow (FCF).

Q1 results and forecast

The streamer’s 10% revenue growth in Q1’22 was driven by an 8% year over year increase in average streaming paid memberships and 2% year over year growth in ARM. “Operating income of $2.0 billion was above our beginning of quarter forecast of $1.8 billion due to lower than projected content expense. EPS of $3.53 vs $3.75 a year ago included a $162 million non-cash unrealized gain from F/X re-measurement on our Euro denominated debt,” says the letter to the shareholders. “In EMEA (-0.3M paid net adds, or +0.4m excluding the Russia impact), we saw a slowdown in our business in Central and Eastern Europe in March, coinciding with Russia’s invasion of Ukraine,” says the streamer, adding that it is making good progress in APAC where it is seeing ‘nice growth’ in a variety of markets including Japan, India, the Philippines, Thailand and Taiwan.