Why Netflix’s Shocking Subscriber Loss Is a ‘Body Blow’ to Streaming Giant

·4-min read

The rallying cry “I cut the cord” that defined a generation of binge watchers and movie addicts is over.

Netflix is hemorrhaging subscribers at a pace that blindsided Hollywood and sent Wall Street diving for cover on Wednesday. The streamer’s first-quarter earnings report revealed the decade-long run of meteoric growth in subscribers gave way to a net decline of 200,000 customers when Netflix forecast it would add 2.5 million signups.

The disappointing subscriber signups weren’t just contained to one region — but worldwide. And that marks an inflection point for a company that once thought it would rule the U.S. market, and then dominate key regions around the globe before competitors emerged.

Now, the investor class that owns Netflix — and the money managers who safeguard their financial decisions — are wondering what went wrong. A theme emerging as trading floors opened for business was why didn’t Netflix see this coming and warn Wall Street sooner.

“This is a body blow to the bull case,” said Santosh Rao, head of research for Manhattan Venture Partners. “Is it churn? Is it competition? Is it just the pricing part of it? Or what exactly is going on and what are they saying?”

The body blow Rao describes was powerful, with an instant 37% drop in Netflix stock that wiped out $170 billion of the company’s valuation. Even the market’s temptation to buy on the dip couldn’t help Netflix stage the slightest recovery. Shares of Netflix, once the high-flying darling of Wall Street, has cratered 60% since January’s highs.

There was certainly rumblings in the corridors of major Hollywood studios that Netflix, the great disruptor of how traditional entertainment studios released episodic series and blockbuster movies, was wrestling with growing pains as content budgets skyrocketed. Some of the company’s decisions, such as raising fees, became a source of contention by Wall Street analysts concerned subscribers might seek cheaper alternatives.

Content chief Ted Sarandos, now the company’s co-CEO alongside founder Reed Hastings, privately told industry colleagues that the streaming service had tackled tough issues in the past and knew how to pivot, an individual with knowledge said.

But now the biggest pivot is front and center, and could be considered an encouraging sign. The streamer is exploring an ad-supported tier at a lower cost, and that such a model could be phased in “over the next year or two.” This was something executives vowed they would never do. On Tuesday’s earnings call, Hastings even acknowledged the success of an ad-supported model at Hulu and how such a model will be introduced on HBO Max as examples of the direction streaming is moving in.

“This is a warning to most of the streaming players that there is just a really tough road, with some of the smaller [streamers],” said Eric Jackson, founder and president of the EMJ Capital hedge fund. “For some of the smaller players, the writing is on the wall of who is the best, and who needs to ramp up.”

Investors can be forgiving if a company loses its way, reports disappointing quarterly results, or telegraphs more bad news is ahead. But, what concerned investors was the face the company’s leadership provided little in the way of an action plan of how they will navigate through the turbulence.

Netflix tried to get ahead of the expected stock turbulence when it released results, saying that revenue growth slowed considerably because of a decision to pull out of Russia after the Ukraine invasion. Another reason offered by executives was the high rate of the estimated 100 million people who watch Netflix for free using a paying customer’s passwords.

The company blamed a “relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds.”

Wall Street’s gyrations indicated what American consumers have been complaining about for years, perhaps unheard. They signed up for Netflix and other streamers as a way to cut back on steep cable bills.

Hastings’ battle cry represents a pivot. The disruptor’s rally against competitors was putting customers first, and not giving into advertising that interrupted watching episodic series or movies. Things are clearly changing at Netflix.

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