Netflix’s Subscriber Exodus Has Hollywood on Edge Ahead of Earnings

·6-min read

Hollywood is bracing for impact: Netflix financial results on Tuesday could become a defining moment for the entertainment industry’s multi-billion dollar streaming arms race.

The streaming giant reported its first quarterly subscriber loss in more than a decade in April, and warned there’s about 2 million more global customers to go. The reaction was swift, with Netflix stock cratering 70% this year to wipe out billions of dollars in market value – and unleashing a wave of fear that studios might need to reconsider prioritizing streaming over legacy businesses like television and theaters.

The shock erosion of Netflix’s 221.6 million global subscriber base has both Hollywood and Wall Street on edge. The possibility of losses being worse than projected, especially as inflation shoves the U.S. economy closer to recession, is a nightmare scenario that makes studio chiefs’ blood run cold.

“This could be the kind of end-of-days, biblical prophecy, eschatalogical moment if you’re Bob Chapek, Bob Bakish, or David Zaslav,” one analyst who covers the major studios told TheWrap about the CEOs of Disney, Paramount, and Warner Bros. Discovery, respectively. “Their whole strategy – their whole tenures leading a studio – is centered around streaming. There is not one meeting or lunch happening in Hollywood over the next few days that isn’t a wall of worry.”

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There’s a lot of money at stake. Streaming services led by Netflix pushed total global content spend past $220 billion in 2021, up 14% year over year, according to Ampere Analysis. The chief executives have already made their case to investors that they are focused on building out streaming services, and in the process more or less taking their eyes off traditional revenue drivers such as television or cable advertising.

So Wall Street began looking at subscriber gains (and losses) as the chief barometer to determine the financial success and future for the big studios. If Netflix badly misses projections – or can’t convince investors that it has a plan to stabilize the subscriber losses and set up future gains – then the pain will jump from one company to the next. Disney is currently the worst performer of the Dow Jones industrial average’s 30 companies – its stock price having fallen 45% over the last year.

Analysts will be watching Netflix results after the closing bell, and the earnings call set for 1 p.m. PT, to forecast where the entertainment industry goes from here.

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Netflix is still the industry’s pacesetter – able to charge an industry-high $15.49 a month for ad-free viewing of hit shows like “Stranger Things” and “Squid Game.” Both have racked up more than 3 billion hours of viewership, and that’s a key measurement considering the company plans to launch an advertising-supported tier potentially in the fourth quarter.

Viewership for “Stranger Things 4” made it the most-watched English language original series in its first month of release, according to Netflix’s own data. It was calculating to release the first seven episodes during the second quarter, and the two concluding shows during the third quarter, thereby increasing new subscribers while mitigating the number of cancellations during one financial period.

“Tapping into the $160 billion global video advertising spending opportunity in the long-term should allow Netflix to drive average revenue per user growth with less reliance on consumer price increases,” said Morgan Stanley analyst Benjamin Swinburne. “Net adds matter to shares, but longer-term ARPU growth expectations matter more.”

At the conclusion of last quarter, Netflix’s ARPU stood at $10.00, third-highest of the major streamers after Hulu and HBO Max.

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Indeed, Netflix has a huge jump start over rivals in terms of subscribers since it pioneered the idea of streaming video content in 2007. As of last quarter, Disney+, launched in late 2019, is in second with 137.7 million, and Warner Bros. Discovery’s to-be-combined HBO Max and Discovery+ totals 101 million (not including the overlap of subscribers who have both services).

Paramount+, home to “Star Trek” and other former ViacomCBS fare, has 62 million subscribers. Hulu, controlled by Disney while Comcast owns 30%, has 45 million. And NBCUniversal’s Peacock, which includes a free, ad-supported tier, had 28 million monthly active accounts and 13 million paid subscribers.

Netflix Chief Financial Officer Spencer Neumann said in April that he didn’t expect the losses to go past the second quarter, saying the company “will grow revenue, and there will be paid net add growth” during the second half of the year.

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The company is already laying out plans to crack down on password sharers, announcing a program on Monday to charge customers in five countries in Latin America to pay extra (about half the normal subscription) for an “add a home” feature. Netflix estimates more than 100 million households globally don’t pay for the platform, and more than 30 million of them are in North America.

Further, analysts like Cowen & Co.’s Jack Blackledge believe that Netflix could charge about $10 a month for an advertising-tier service that could boost the total number of subscribers in the U.S. and Canada by more than 4 million next year.

That’s not even touching the benefits Netflix might get out of last week’s surprise announcement of an advertising partnership with Microsoft. The deal could converge with Netflix’s growing ambitions in the video game field since Microsoft has 100 million active monthly Xbox users and the looming acquisition of Activision Blizzard for $69 billion.

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There’s a lot of moving parts to cram into the second half of the year to boost the company that would have been hard to do even if the streamer didn’t have any competition. But now, Netflix has every major television and movie studio in town gunning for them – not to mention Amazon, where video streaming makes up just a small part of the $1.2 trillion company.

“We sense low conviction across the Street, so this is another wait-and-see quarter, with investors likely resetting afterwards,” said Wells Fargo analyst Steven Cahall.

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