Netflix’s Stumble Can Be A Warning Sign For The Streaming Industry

Many entertainment executives, tired of playing catch-up to a Silicon Valley interloper, have been waiting for the comeuppance of Netflix. But this may not have been the way they hoped it would happen.

Netflix said this week that it lost more subscribers than it did in the first three months of the year, reversing a decade of steady growth. The company’s shares nose-dived 35 percent on Wednesday while shedding about $ 50 billion in market capitalization. The pain was shared across the industry as stock companies like Disney, Warner Bros. Discovery and Paramount also declined.

Netflix blamed a number of issues, ranging from increased competition to its decision to drop all its subscribers in Russia because of the war in Ukraine. To entertainment executives and analysts, the moment felt decisive in the so-called streaming wars. After years of trying, they may see a chance to gain ground on their giant rival.

But Netflix’s stunning reversal also raised a number of questions that will be answered in the coming months as more and more traditional media companies race against subscription businesses modeled largely after what Netflix created. Is there such a thing as too many streaming options? How many people are really willing to pay for them? And could this business be less profitable and far less reliable than what the industry has been doing for years?

“They switched from a sound business model to an unsound one,” veteran entertainment executive Barry Diller said in an interview Wednesday, referring to several legacy companies that have recently debuted streaming options. “I would guess today they were saying, ‘Maybe the trees won’t grow to the skies.'”

The media industry, worried about declining movie theater ticket sales and broadcast television ratings, has been reshaping itself to go all-in on streaming and compete with Netflix. Disney has invested billions. Discovery Inc. And WarnerMedia completed a merger this month to better compete with streaming behemoths. CNN has even introduced a streaming version of itself, which has so far drawn underwhelming interest from subscribers.

But Netflix’s sudden problems show that those investments come with a lot of risk. The streaming market may still be a giant one over the long term, but the next few years could be difficult, said Rich Greenfield, an analyst at LightShed Partners and a longtime streaming booster.

“No matter what, it looks far less profitable, and that’s a problem for everyone,” he said. Fewer subscribers are coupled with increased costs because of the fiercer competition to create original content meaning less profit for everyone.

Another concern, some analysts say, is the so-called churn rate. Consumers are increasingly warming to rising prices for streaming services and more likely to cancel a service when a favorite show comes to an end, said Kevin Westcott, vice president of the consulting firm Deloitte. According to Deloitte, 25 percent of US customers have canceled a streaming service only to resubscribe within a year.

“They’re frustrated that they have so many subscriptions to get all the content they want,” Mr. Westcott said.

Netflix’s issues will increase pressure on Disney, which will report subscriber numbers on May 11. If Disney’s figures fail to live up to expectations, the streaming business around the streaming business will grow louder.

There was also fear among Hollywood talent agents on Wednesday that the Netflix gravy train could slow down and that the company’s willingness to pay whatever it took for scripts and talent deals could vanish. The same went for producers. Netflix has spent hundreds of millions of dollars over the past five years pursuing Academy Awards. It has yet to be a best picture Oscar, but its commitment to prestige filmmaking has been praised.

“The impact we have on new reality forces will cut them back on their $ 17 billion-a-year programming budget,” said Michael Shamberg, whose four-part documentary on the three Mile Island nuclear plant crisis will debut on Netflix next. month. “As a producer, I always think of them as a first stop for pitching original ideas. If their subscriber growth levels off and it forces them to cut back on programming, will they stop taking risks on innovative TV shows and Oscar films? “

Netflix acknowledged that ferocious competition was a reason that growth had stalled. The company used to say its primary competition was not from other streaming services but from diversions like sleeping and reading.

Now there is a question about whether Netflix’s original content is strong enough to set it apart, as even deep-pocketed companies like Apple and Amazon continue to critically acclaim their spending on “Severance,” which is carried on Apple TV +, and The upcoming first season of a “Lord of the Rings” prequel, for which Amazon is said to be spending more than $ 450 million.

“The reality is there is so much alternative content out there, where is the new stuff that is just crushing it? Where are the new franchises? ” asked Mr. Greenfield, the analyst. He noted that popular shows like “Ozark,” “Stranger Things” and “The Crown” would soon be ending their runs.

Indeed, interest in Netflix’s vast library has been showing signs of plateauing.

“For every single title on the Netflix catalog, demand is pretty much flat,” said Alejandro Rojas, vice president of applied analytics at Parrot Analytics, a research firm. “The catalog for HBO Max and Disney + is growing double digits. That ‘s a big difference. “

Netflix’s performance could also cause rivals to reconsider their own international expansion plans, potentially making more targeted efforts overseas. Netflix’s subscriptions have been rejected not only in the United States and Canada but also in Europe and Latin America.

“Netflix has thrown the kitchen sink at this,” said Michael Nathanson, an industry analyst. “They were a first mover, they spent a ton on content, and they were making more localized content. They’ve done the right things, and yet they’ve hit a wall. “

Netflix executives, usually self-assured, seemed notably unsteady on Tuesday, when the first-quarter results were released. The co-chief executive of Reed Hastings, who once swore there would never be ads on Netflix, said the company would consider introducing a lower-priced, advertising-supported tier in the next year or two. Netflix also said it would crack down on password sharing, a practice that in the past it said it had no problems.

“We’ve been thinking about that for a couple of years, but when we were growing fast it wasn’t a high priority to work on,” Mr. Hastings said. “And now, we’re working superhard on it.”

Netflix has no advertising sales experience, while rivals like Disney, Warner Bros. Discovery and Paramount have vast advertising infrastructure. And the password crackdown has led some analysts to wonder whether Netflix has already reached market saturation in the United States.

Mr. Hastings tried to reassure everyone that Netflix had been through tough times before and that it would solve its problems. He said the company was now “superfocused” on “getting back into our investors’ good graces.”

Brooks Barnes contributed reporting.

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