What's Going on With Netflix? Everything You Need to Know About the Company's Massive Fall
The streaming giant was down a whopping 26% in premarket trading on Wednesday upon the release of its latest earnings report.
The company reported a 10% increase in revenue during Q1 of 2022, including an 8% increase in average streaming paid memberships.
Here’s everything you need to know about what’s going on with the streaming service.
Netflix is bleeding subscribers
The company announced that it had lost a record net 200,000 subscribers during Q1 of 2022, its biggest drop off in over a decade.
“In the near term though, we’re not growing revenue as fast as we’d like,” the company warned in a letter to shareholders. “COVID clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the COVID pull forward. Now, we believe there are four main inter-related factors at work.”
People are sharing passwords
Among these factors listed was the fact that the company estimates that over 100 million additional households (the company currently has 222 million paying subscribers) have access to the streaming service due to passwords being shared.
“Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth,” Netflix wrote.
The company recently announced an effort to crack down on password sharing in March when it announced that it would roll out new features in Chile, Peru and Costa Rica — one where users can add “sub accounts” to their accounts for users not in their households that will have separate passwords for a lower price than the normal subscription price and the ability to transfer profile information to a new account while keeping viewing history and recommendations.
Netflix has become one of many streaming giants
Though Hulu and Youtube TV (as well as Amazon) have long been competition for Netflix, the inception of services like Disney+ and HBO Max have provided even more competition for the streaming giant, especially with parent companies that have prominent legacy reputations.
Though Netflix is still the largest streaming subscription service in the world when it comes to paid memberships and revenue, it’s become clear that the competition is growing rapidly.
HBO and HBO Max, for example, ended 2021 with over 46.8 million subscribers in the U.S., which was up 5.3 million from the year prior.
The company needs to shift to a global perspective
The success of shows like Squid Game (Korean) have shown that internationally-based programs can find just as much success in the U.S. market.
Netflix said it plans to double down on its international presence in an order to continue expansion and paid revenue.
“Much of our growth will come from outside the US. Traditionally, US entertainment companies have viewed “international” as an export market for US content. But we saw long ago that great stories can be made anywhere and loved everywhere - dramatically broadening the pool of creators with whom we can work, increasing the variety of our programming and better serving local tastes,” Netflix said. “To support this, we’ve been building out capabilities like creative development, personalization, and language presentation/localization. Netflix is now producing films and TV in more than 50 countries with a high degree of integration in the local entertainment ecosystem resulting in the creation of blockbusters from every region.”
The company has hiked up prices
Subscription prices for users have changed in recent months in an effort to make up for lost revenue and subscribers.
In January, Netflix announced that it would increase prices in the U.S. and Canada up to $15.49 for a standard plan and up $2 to $19.99 for premium plans.
Billionaire investors are pulling out
Hedge fund billionaire Bill Ackman, who is head of Pershing Square Capital Management, poured $1.1 billion into Netflix just three months ago and as of Thursday, quickly pulled out of his investment.
Ackman purchased 3.1 million shares of the company when share prices were selling at $375 per share.
As a result of the loss, Pershing Square Funds were down around two percent year-to-date as of close on Wednesday.
Ackman addressed Netflix's decision to "go after" non-paying customers and to start incorporating advertising in a way to earn back losses that would take "one to two years."
While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity.
"While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity," Ackman penned in a letter to Perishing shareholders. “While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty."
He cited "past mistakes" as a reason to "act promptly" when an investment begins to look like it's going south.
Reuters estimates that Ackman's losses from the investment are arounf $400 million.
Netflix was down over 35% at close day over day on Wednesday, and dropped another 5.47% as of Thursday morning.
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