Streaming services that revolutionized how people consume entertainment are now facing a host of challenges when it comes to growing — or even sustaining — their subscriber base.
On Tuesday, Netflix's first-quarter earnings showed the streaming service lost 200,000 subscribers — its first decline since 2011. The results rattled investors, and Netflix's stock took a 37 per cent plunge by Thursday morning.
The market was expecting weak performance in this last quarter, but the extent of the drop came as a "total shock," said senior Bloomberg Intelligence analyst Geetha Ranganathan.
"It raises questions about the ultimate endgame for Netflix, of course, and for all streamers," she said.
Netflix stock price over the last five years
Ranganathan pointed to a host of factors playing into Netflix's troubles, including after-effects of the pandemic, inflation and the Ukraine war. The company lost 700,000 subscribers after suspending its services in Russia last month.
However, Netflix's domination of the streaming industry has been under threat for some time, with the rise of other streaming platforms, including Amazon Prime Video, Disney Plus and HBO Max, or Crave in Canada.
"Netflix in the past has just kind of downplayed it,' said Ranganathan.
Other streamers likely to experience similar challenges
In a conference call with investors on Wednesday, Netflix CEO Reed Hastings acknowledged the success of the platform's competitors and the impact they're having on Netflix's performance.
"We have great competition. They've got some very good shows and films out. And what we've got to do is take it up a notch," he said.
AT&T's first-quarter earnings, released Thursday, showed HBO and HBO Max added three million subscribers so far in 2022, hitting nearly 77 million subscribers worldwide.
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While Netflix is grabbing headlines for losing subscribers, that bad news is partly a function of the streaming giant being the front-runner in the industry, with around 222 million subscribers worldwide.
"You have all the other streamers that are kind of still trying to play catch up to Netflix," said Ranganathan. "Down the road, they're probably going to be running into these exact same problems."
The expectation from investors that Netflix would grow quarter after quarter was unrealistic, says Jon Giegengack, the founder of Entertainment Hub Research, a U.S.-based consumer research company.
"The slowing or the stagnation of their growth is something that I think was inevitable because they had the market to themselves for so long, and now, after quite a long time, are starting to face some real significant competitors," he said.
Rising cost of living pushing people to cut expenses
Meanwhile, as inflation reaches a 31-year high in Canada (and a 40-year high south of the border), many are having to consider where they can start trimming their budgets.
For Christine MacDonald-Stirrat, of London, Ont., one of those areas has been subscriptions to streaming services. The 27-year-old says she recently cancelled her Crave account because she didn't feel she was getting her money's worth with the content available.
"For a while it was like, 'Oh, whatever. I don't care,'" said MacDonald-Stirrat. "But now when groceries are going up and gas is going up and rent is astronomical, it's like, OK, I have to cancel, because now that does make a difference."
According to a survey conducted earlier this year by Angus Reid in partnership with CBC News, 53 per cent of Canadians are cutting down on discretionary spending. The survey was conducted between Feb. 11 and 13 with 1,622 Canadians and carries a margin of error of plus or minus 2.5 per cent, 19 times out of 20.
Inflation is playing into Netflix's challenges when it comes to holding onto subscribers, said Ranganathan. "There's only so much that consumers can afford to pay for all of these different streaming services."
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Streaming services actually struggle with higher rates of "churn" than cable providers, said Giegengack, because they don't require contracts to sign up.
A recent report released by Deloitte on digital media trends found generation Z and millennial consumers are especially likely to cancel subscriptions to video-streaming services.
"Streaming platforms are already aware of the importance of keeping people engaged once they sign up," said Giegengack.
Finding other streams of revenue
As Netflix hits a ceiling with its customer base, the streaming giant is looking at other ways to bring in revenue.
It's now considering tiered subscriptions that would provide a cheaper alternative to current plans, with advertising integrated into the watching experience.
"Those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription," said Hastings in Wednesday's conference call. "But as much as I'm a fan of that, I'm a bigger fan of consumer choice."
Netflix wouldn't be the only streaming service to include advertising in their content. Disney Plus announced last month its intention to introduce a subscription tier with advertising in the U.S.
Offering both options can help the company reach a larger consumer base, said Giegengack. His company's research has found that more than half of people are willing to watch ads if it means saving $4 or $5.
"Not all consumers have tolerance for ads, but a surprising number of them do," he said.
Netflix is also hoping to address password sharing, estimating in their letter to shareholders that some 100 million households currently share their passwords with other households. Last month, the company launched a pilot project in Chile, Peru and Costa Rica where customers can pay a fee to share their password.
"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 read.
The future of streaming
Based on current trends, Netflix is further forecasting it will lose an additional two million subscribers in the second quarter of this year, leading to some concern about the streamer's future.
While Netflix has been a "pioneer" when it comes to its content, Ranganathan said its earning results raise questions about whether that content is resonating, despite the billions being poured into it.
"They really have to kind of take a look at their model and see how to create more content without spending as much — but really create content that keeps viewers engaged," said Ranganathan.
Despite these recent results, Giegengack says he doesn't believe the future is all grim for streaming, particularly as people today are more likely to have multiple subscriptions than they were a few years ago.
One way Giegengack says the industry may change is through the bundling of services, where streamers with complementary content or services will start offering packaged subscriptions to consumers.
"Consumers increasingly see value in aggregators that kind of combine this stuff for them," he said.
This type of bundling has already started to happen, with telecom companies like Rogers offering Disney Plus with their TV services.
And while streamers may have to find new ways to turn profit and improve retention of consumers, both Ranganathan and Giegengack agree Netflix's challenges today in no way signify the end of streaming.
"I don't think it's the end of Netflix or the end of streaming," said Ranganathan. "It's definitely a recalibration of expectations."