Netflix Loses Paid Users For the First Time in a Decade

Shareholders expected Netflix to hit subscriber growth of 2.7 million in Q1 of 2022. So, when the company announced that it had lost 200,000 subscribers — the first decline in paid users since late 2011 — and warned of further problems ahead, the feeling in the room must have been less ‘Netflix and Chill,’ and more ‘ Netflix and OMFG it’s over.’

In startling contrast to recent fortunes, the company said it expects to lose a further 2 million subscribers in the next quarter. For context, Netflix added 3.98 million paid users during the same period a year ago. In a letter to shareholders, the company played the role of Captain Obvious, stating, “Our revenue growth has slowed considerably,” adding that “we’re not growing revenue as fast as we’d like.”

In an industry where growth is the only metric considered, this is as a big red flag as it gets.

When the news broke, Netflix’s share price tanked as much as 25% in after-hours trading, compounding the stock’s decline over the past six months. The stock price was sitting at an all-time high of $690 in November 2021, but it has been sliced in half on the back of several disappointing quarters.

The company blamed several factors; the suspension of services in Russia, increased competition, and password sharing. Netflix has over 220 million paid subscribers and believes the service is being shared with an additional 100 million households. So, in theory, based on the U.S. price for a standard plan ($15.49 per month), the company is losing millions in monthly revenue. And with things getting tighter and stock price lowering, Netflix has started to crack down on password sharing, testing out a feature that would prompt subscribers to pay extra if they were sharing the service with people outside their own household. And though it didn’t go as far as saying it, it admitted its content has been lacking, reassuring investors that the company would “improve “all aspects of Netflix — in particular, the quality of our programming and recommendations.”

But more so, the market landscape has changed in the last 6 months.

While streaming services reveled in the pandemic conditions and enjoyed exponential growth thanks to the perfect combination of their target market having increased extra income and increased time to spend it, the world is returning to a more ‘normal’ lifestyle. And that loose cash we all had burning a hole in our pockets is long gone; the current cost of living crisis is causing people to rethink how they spend their money. In many cases, streaming services are the first to be paused (if you can’t use your brother’s password. Totally not what I do) or canceled. Netflix acknowledged as much, noting that “the pandemic-era gains clouded the picture.”

The downturn signals more than just a bad few months for Netflix. The whole streaming industry is realizing that there are only so many credit cards in the world, and the number isn’t enough to keep subscriber growth across all these platforms accelerating. And you can’t just keep increasing the price — Netflix’s recent price hike in January led to a loss of 600,000 US subscribers.

In a true full-circle moment, Netflix thinks one answer is to offer lower-tier subscriptions that will include — shock horror — adverts. Some of its competitors, including Hulu and Disney+, already offer cheaper plans that include advertising. The company hopes this plan will entice some of those borrowing passwords to commit their own cash to the service. The move makes sense. TV advertising is dying, and those agencies need somewhere else to shout loudly. Should streaming services allow adverts, the market will be worth billions, especially if advert slots are priced based on show popularity. The fees for the top shows could be astronomical. The latest season of Bridgeton was watched 627.11 million hours… which makes for prime ad space. But on the flip side, no one likes adverts, which is one reason why people flocked to on-demand streaming services. So what difference will it offering this tier make if most users opt not to use it?

The bottom line is this: there are too many services in existence, and the ever-increasing prices will force the users to dip in and out when necessary, increasing churn rate and CAC costs. There are too many players offering too many things requiring too many subscriptions. The average U.S. household already uses 4.7 services. How many more can we realistically add to our stack?

The real answer to the streaming industry’s problem is consolidation. The time will soon come for the top two or three (Disney, Amazon and Apple) to eat up the rest, reducing consumer choice but hopefully driving up quality. While Netflix may once have seen itself in that top brass, its current and future outlook says otherwise.