Netflix shocked Wall Street on Tuesday by posting its first loss of subscribers in a decade, according to its first-quarter earning report. After the loss was reported, the stock plunged in after-hours trading about 24% at time of writing.
The streaming giant said profit rose to $3.53 per share on revenue of $7.78. Analysts expected a bottom line of $2.89 per share on revenue of $7.93 billion for the three months ending in March.
The stock plunged about 24% in after-hours trading as investors were alarmed by the unexpected loss of customers, and a projection by Netflix that much more is in store for the current quarter. It indicated a shift in investor sentiment that the declines were much more than just subscriber belt-tightening as inflation ripples through the economy.
Almost every corner of the world where Netflix operates recorded added switched off Netflix. The company 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 flee in Europe, the Middle East and Africa and 350,000 in Latin America. And the company expected that to continue into Q2, when Netflix estimates an additional 2 million subscribers.
The company noted that password sharing might be one of the factors it suspects has led to slower subscriber growth, dropping to 221.64 million from 221.8 in Q4 of 2021. And its current projections for next quarter could be even worse, according to the company’s projections.
“When you think about all the account sharing, that’s not a new thing, but when you add that all together, we’re getting pretty high competition, and lot of penetration.” said co-CEO Reed Hastings on the earnings call. “We are working on how to monetize sharing. We were working on that for a couple of years but when we growing fast, it wasn’t a high priority to work on. These are over 100 million households that already choose to use Netflix. They love the service. We just need to get paid in some degree from them.”
But Tuesday’s earnings suggested a change in consumer behavior as core customers are being lured by competitors with robust entertainment offerings, from Disney+ to HBO Max to Apple+.
In addition, entertainment content on the streamer was not strong in the first quarter, many obserers have noted. The only highlight released during the quarter was Ryan Reynold’s “The Adam Project,” but other shows like “Don’t Look Up” were holdovers from 2021.
Other projects have been serially delayed because of COVID including “The Sandman” and the new season of “Stranger Things.”
The subscriber loss is a massive blow for an entertainment pioneer that rewrote the playbook on how consumers watch television and movies. The streamer experienced an unexpected growth spurt in the first year of the pandemic when Americans were forced to stay home — adding 36 million subscribers.
Netflix said in a letter to shareholders that the company’s decision to suspend services in Russia led to the loss of 700,000 subscribers.
The company also estimated that roughly 100 million households worldwide receive Netflix through password sharing, including 30 million in the U.S. and Canada alone.
“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,” the company wrote.
Netflix also pointed to a recent pilot program that it launched in March in Latin America around paid sharing features, including the option to pay to share Netflix outside of your own household. And they suggested to subscribers that they’ll be looking for ways to better “monetize sharing,” or crack down on people who obtain Netflix primarily through sharing accounts.
“We’ve always tried to make sharing within a member’s household easy, with features like profiles and multiple streams. While these have been very popular, they’ve created confusion about when and how Netflix can be shared with other households,” the letter reads. “There’s a broad
range of engagement when it comes to sharing households from high to occasional viewing. So while we won’t be able to monetize all of it right now, we believe it’s a large short- to mid-term opportunity.”
The streaming giant has come under pressure in recent years to expand content as it becomes a more global company and faces stiff competition from the likes of Disney+, HBO Max and Apple+. Analysts pointed out Netflix has spent heavily on content —$17 billion in 2021 .
The company has carefully telegraphed for the better part of a decade that it will add tens of millions of customers each year as more people around the world cut the cord. Today’s results suggest that the environment has shifted and that Netflix may need to pursue a different strategy going forward.
Brian Welk contributed to this report.