Netflix’s stumbling block could be a warning sign for the streaming industry

Tired of catching up with a Silicon Valley invader, many entertainment executives have been waiting for Netflix’s reward. But this may not have been the way they had hoped it would happen.

Netflix said this week it lost more subscribers than it signed up in the first three months of the year, reversing a decade of steady growth. The company’s stock fell 35 percent on Wednesday as it lost about $50 billion in market capitalization. The pain was shared by the entire industry as shares of companies like Disney, Warner Bros. Discovery and Paramount also fell.

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

But Netflix’s stunning turnaround has also raised a number of questions to be answered in the coming months, as more traditional media companies rush to subscription companies largely modeled on what Netflix has created. Is there such a thing as too many streaming options? How many people are really willing to pay for it? And could this business be less profitable and much less reliable than what the industry has been doing for years?

“They switched from a healthy business model to a flawed one,” veteran entertainment executive Barry Diller said in an interview on Wednesday, citing many legacy companies that have recently introduced streaming options. “I guess today they say, ‘Maybe trees don’t grow into the sky.'”

Worried about declining movie ticket sales and TV ratings, the media industry has reformed itself on the fly 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 giants. CNN has even introduced a streaming version of itself, which has so far sparked disappointing subscriber interest.

But Netflix’s sudden troubles show that those investments come with a lot of risk. The streaming market may still be a mammoth in the long run, but the coming years could be tough, said Rich Greenfield, an analyst at LightShed Partners and a longtime streaming booster.

“Whatever happens, it looks a lot less profitable, and that’s a problem for everyone,” he said. Fewer subscribers coupled with higher costs due to fiercer competition to create original content means less profit for everyone.

Another concern, some analysts say, is the so-called churn rate. Consumers are wary of rising streaming service prices and are more likely to cancel a service when a favorite show ends, said Kevin Westcott, vice chairman of the consulting firm Deloitte. According to Deloitte, 25 percent of U.S. customers have canceled a streaming service only to resubscribe within a year.

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

Netflix’s problems are putting pressure on Disney, which will report subscriber numbers on May 11. If Disney’s numbers don’t live up to expectations, the distress signals around the streaming business will grow louder.

There were also fears among Hollywood talent agents on Wednesday that the Netflix justice train could slow down and the company’s willingness to pay anything for scripts and talent deals could disappear. The same was true for producers. Netflix has spent hundreds of millions of dollars in pursuit of Academy Awards over the past five years. It hasn’t won a Best Picture Oscar yet, but its dedication to making prestige films has been acclaimed.

“The effect will be on us if the new reality forces them to cut back on their $17 billion a year programming budget,” said Michael Shamberg, whose four-part documentary on the Three Mile Island nuclear power crisis will debut on Netflix next week. month. “As a producer, I always see them as a first stop for pitching original ideas. If their subscriber growth flattens and it forces them to cut back on programming, will they stop taking risks with innovative TV shows and Oscar movies?”

Netflix acknowledged that fierce competition was part of the reason that growth stalled. The company always said its primary competition was not from other streaming services, but from diversions like sleeping and reading.

Now there’s a question of whether Netflix’s original content is strong enough to stand out as even companies with deeper pockets like Apple and Amazon continue to increase their spending on critically acclaimed shows like “Severance,” which runs on Apple TV+, and upcoming first season of a “Lord of the Rings” prequel, for which Amazon is reported to spend more than $450 million.

“The reality is there is so much alternative content, where are the new things that just crush it? Where are the new franchises?” asked Mr. Greenfield, the analyst, noting that popular shows like ‘Ozark’, ‘Stranger Things’ and ‘The Crown’ would soon be shutting down.

Interest in Netflix’s vast library is indeed showing signs of stagnation.

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

Netflix’s performance could also cause rivals to rethink their own international expansion plans, possibly making more focused efforts abroad. Netflix subscriptions declined not only in the United States and Canada, but also in Europe and Latin America.

“Netflix has thrown in the sink here,” said industry analyst Michael Nathanson. “They were a first mover, spending a lot on content and creating more localized content. They did the right things, and yet they ran into a wall.”

Netflix executives, who were normally self-assured, appeared remarkably unstable on Tuesday as the first-quarter results were released. Co-chief executive Reed Hastings, who once swore there would never be ads on Netflix, said the company would consider introducing a cheaper ad-supported tier within a year or two. Netflix also said it would crack down on password sharing, a practice it said it had no problem with in the past.

“We thought about that for a few years, but as we grew rapidly it wasn’t a high priority to work on,” said Mr Hastings. “And now we’re working super hard on it.”

Netflix has no experience selling ads, while rivals like Disney, Warner Bros. Discovery and Paramount have extensive advertising infrastructure. And the password crackdown has led some analysts to question whether Netflix has reached market saturation in the United States yet.

Mr. Hastings tried to reassure everyone that Netflix had been through some rough times before and that it would solve its problems. He said the company was now “super focused” on “returning the favor of our investors”.

Brooks Barnes contributed to reporting.

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