This analysis was first published in SvD Näringsliv, in Swedish, on April 20th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Netflix shares crashed 35 percent after the company lost subscribers for the first time in more than ten years. SvD’s tech analyst Björn Jeffery breaks down what happened, and the challenges the streaming giant now faces.
What is Netflix’s big problem?
If you have to sum it up in a single word: user growth. Or rather, the absence of it. For the first time in more than a decade, the number of households paying for Netflix is shrinking.
The market had been expecting an increase of 2.7 million new customers. Instead, Netflix lost 200,000. On top of that, the company believes the number will drop again next quarter, which could be the start of a worrying trend. That is what the market reacted so strongly to.
Could my subscription get more expensive?
Yes, it could. And if you are a long-standing Netflix customer, it has already become considerably more expensive in recent years. There have been four price hikes in as many years. The most recent came this spring, which makes the most expensive plan in the US cost $19.99, and SEK 179 in Sweden, compared to $11.99 in September 2017.
Netflix regularly tests the price sensitivity of its customers. But the competitive landscape in streaming makes this question more complex. It is particularly tricky when Netflix is up against companies with different business models than simply selling film and TV subscriptions. Apple TV+ and Amazon Prime, for instance, both cost SEK 59 per month. Apple offering film and series can be viewed as an add-on to its primary business of selling hardware, which lets it be more competitive on price.
Will there be ads in the middle of Bridgerton now?
If you had asked last week, the answer would have been no. This has come up many times before, and Netflix has historically taken a hard line against advertising. But yesterday, CEO Reed Hastings said for the first time that the company was open to testing a cheaper subscription that included ads. That would be an option for viewers willing to tolerate ad breaks in exchange for a lower monthly fee. Hastings said they would look at this kind of subscription over the next year.
Is password sharing a big problem for Netflix?
Yes, at least if you believe the company. Netflix says it has 222 million paying households. But on top of that there are another 100 million households using Netflix by borrowing someone else’s subscription. That suggests the appetite for Netflix content is there. But why pay if you don’t have to?
The question of shared subscriptions came up as early as 2016, when Reed Hastings described it as “something you have to learn to live with.” That generosity was less of a problem when the company was still growing rapidly. Earlier this spring Netflix tested letting customers pay a slightly higher monthly fee in return for sharing their account with friends and family. It is cheaper than having your own subscription, but still increases Netflix’s revenue somewhat. The test has so far been limited to Chile, Peru and Costa Rica, but you could imagine a similar solution in Sweden.
Does Netflix really need to produce so much expensive original content?
Just buying old series and films was the model Netflix started with. Back then streaming was seen as a small genre the big players didn’t need to worry too much about, and the large film and TV companies were still entirely focused on the traditional market of cinema and TV. Making money by selling to Netflix was viewed as a bonus.
But as Netflix grew, the rights holders became aware of the value of their old catalogues and started raising prices. Then they launched their own streaming services — HBO Max, Paramount+ and Disney+. Netflix has little choice but to produce and finance its own material, since the available catalogue is significantly smaller now than before. And that can get expensive, because you don’t know whether something is a hit until the series has started airing.
