Netflix took a big hit in the first quarter as the streaming giant lost 200,000 net subscribers.
The subscriber metrics were unexpected, badly missing Wall Street expectations and Netflix’s own guidance that projected adding 2.5 million paid users for the quarter. Excluding subscriber losses related to suspending service in Russia following the invasion of Ukraine, Netflix would’ve added 500,000 customers in Q1. The streamer’s stock plunged on the weaker-than expected results and guidance, dipping 35% as of Wednesday morning.
And losses aren’t anticipated to let up as Netflix forecasts losing another 2 million users in Q2. It didn’t provide full year guidance but on the earnings call Tuesday, Netflix CFO Spencer Neumann said “there will be paid net add growth.”
As of the end of March Netflix had 221.64 million global paid subscribers. The first quarter compares to Q1 2021 when it added 3.98 million net additions. In the most recent fourth quarter Netflix netted 8.28 million subscriber additions.
In a letter to shareholders, Netflix pointed to revenue headwinds.
“Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds,” Netflix stated in a letter (PDF) to shareholders. “The big COVID boost to streaming obscured the picture until recently.”
Revenue was up 9.8% to $7.86 billion in Q1 but slowed significantly compared to 24.2% year over year growth in Q1 2021. It’s guiding for revenue growth of around 10% year over year in Q2.
Netflix said it plans to reaccelerate viewing and revenue with improvements across the service, particularly on quality programming and recommendations.
“On the content side, we’re doubling down on story development and creative excellence,” the streaming giant told shareholders, noting big hits in Q1 such as Bridgerton and Inventing Anna (stemming from a partnership with Shonda Rhimes) and films like Tinder Swindler and The Adam Project.
Netflix, a long-time advocate of its strictly subscription-based streaming model, will also consider exploring an ad-supported tier, according to CEO Reed Hastings on the earnings call. It will also continue expanding into mobile gaming while separately focusing on monetizing Netflix sharing as it cracks down on multi-household password sharing. It expects that longer term, much of its growth will come from outside the U.S. and cited extending its lead in local entertainment across regions as an important focus.
The company called out four inter-related factors it says are creating growth headwinds:
- External factors it can’t control – specifically, the uptake of connected TVs, adoption of on-demand entertainment, and data costs for its underlying addressable market of broadband homes. “We believe these factors will keep improving over time, so that all broadband households will be potential Netflix customers.”
- Password sharing - Netflix estimates that in addition to 222 million paying households, the streaming services is being shared with over 100 million additional households, including 30 million in the Canada and U.S. region. (Netflix has already said that password sharing is problem and plans to crackdown – last year Citi analyst Jason Bazinet estimated the streaming giant had lost $6 billion in revenue annually because of password sharing).
“Account sharing as a percentage of our paying membership hasn’t changed much over the years, but couped with the first factor, means it’s harder to grow memberships in many markets” something that was obscured by growth during COVID.
In March the company introduced new paid sharing features with testing in three Latin American markets, where subscribers pay extra for sharing with people in other households.
“There’s a broad range of engagement when it comes to sharing households from high to occasional viewing. So while we won’t be able to monetize all of it right now, we believe it’s a large short- to mid-term opportunity,” the company said its letter to shareholders.
It will likely take a year or so of testing mechanisms to monetize sharing, after which a solution will be launched globally including markets like the U.S., according to COO and Chief Product Officer Gregory Peters.
“We're not trying to shut down that sharing, but we're going to ask you to pay a bit more to be able to share with” family members in a different city, for example, so that they “gets the benefit and the value of the service, but we also get the revenue associated with that viewing,” Peters said on the earnings call.
- Competition - While competition against Hulu, Amazon Prime and linear TV has remained steady for 15 years, the landscape has heated up over the last three years including the launch of many new streaming services. Netflix said its U.S. TV viewing share has been steady, but it wants to grow that faster, noting it’s an indicator of higher satisfaction which leads to higher retention and revenue. (A recent MoffettNathanson report on SVOD subscriptions showed smaller players such as Peacock and Paramount+ saw big lifts in penetration in Q1, while giants like Netflix and Amazon Prime Video remained flat)
In the U.S. and Canada Netflix implemented a price hike in January, it’s first since October 2020 – it maintains that continued soft acquisition is the main challenge for membership growth across regions. Still, Netflix said that the recent price changes are largely tracking in-line with expectations and is significantly revenue positive. Netflix lost 640,000 U.S./Canada paid net subs in Q1, largely a result of the price increase. Overall retention was lower than expected but still at a very healthy level, according to Netflix.
- Macro factors - including slow economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from Covid. Netflix said it shed 700,000 paid net additions as a result of its decision earlier this year to suspend service in Russia and wind down of all Russian paid memberships
Still, Global Data Principal Technology analyst Tammy Parker thinks Netflix isn’t taking a hard look at itself.
“Netflix has shied away from acknowledging the changing competitive landscape and avoided looking in the mirror to see where it needs to improve,” commented Parker in a statement. “Netflix’s Q1 earnings letter to shareholders cited external factors that it says are creating growth headwinds, but most of these are far from being new issues and only serve to highlight the company’s own internal weaknesses.”
Parker went on to say that the five notable areas where Netflix is still vulnerable include competition, pricing strategy, content investment, password sharing and expansion into gaming.
“Netflix has been, until recently, incredulous regarding the threats posed by new streaming competitors like Disney+,” Parker said. “This left Netflix unprepared, and now it is scrambling to react. Netflix should understand that many current and former customers have ‘been there, done that’ when it comes to Netflix and are interested in trying out a bevy of competing streaming services. Plus, there is an untapped pool of younger customers who may never sign up for Netflix.”