This analysis was first published in SvD Näringsliv, in Swedish, on October 19th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

In an increasingly squeezed streaming market, Netflix is launching a cheaper, ad-supported tier. But the company may need more radical change to stay competitive.

That was the mood back in April, when Netflix announced it had lost subscribers for the first time in ten years. The stock dropped more than 25 percent immediately. The share price has stayed under pressure, with the company down nearly 60 percent since the start of the year. Markets were therefore watching closely when Netflix presented its quarterly results on Monday evening, eager to see how the company was holding up amid roaring inflation and an approaching recession.

The feeling was something like a comeback. In a letter to shareholders, Netflix now says “we believe we’re on a path to re-accelerating growth.” The company added more than twice as many new subscribers as the market had expected, and the share price surged in after-hours trading. Revenue was slightly lower than the previous quarter, however — so the key factor was really the low expectations set earlier in the year, rather than a clear-cut turnaround.

Much of the way forward will hinge on the new ad-supported tier Netflix is launching in November. The aim is to attract new customers at lower prices — not to push existing subscribers to downgrade. The launch covers twelve countries, though Sweden is not on the list yet.

The ad-supported model is borrowed from Netflix’s closest competitor, the American streaming service Hulu. Hulu offers two types of subscription — one with ads, one without. The latter costs roughly twice as much, but it is actually the ad-supported tier that generates more revenue for Hulu overall. This is an income stream Netflix cannot afford to ignore, even if they held out for as long as they could before looking at advertising solutions.

Looking at the competitive landscape, Hulu sits at the centre of that too — even for the Swedish market, despite the service not being available here. The reason: Hulu is owned by Disney. They hold a majority stake and will be required to buy the remaining 33 percent from telecoms giant Comcast in January 2024. The deal came about after Disney bought 21st Century Fox for $71.3 billion at the end of 2017, gaining a majority of Hulu in the process but negotiating the right to buy out Comcast later. That moment is just over a year away. At that point, Disney will own three separate streaming platforms — Hulu, Disney+, and the sports service ESPN+.

Does that sound complicated? It is. Which suggests more mergers and consolidation to come. You only need to look at deals already agreed to see where this is heading.

Discovery and Warner Media — owner of HBO and CNN, among others — are currently in the middle of a merger that has led to mass layoffs and internal confusion. The resulting company also has two streaming services of its own: Discovery+ and HBO Max. One of the smaller players, Paramount+, is considering merging with the film service Showtime.

So there will be fewer owners of streaming services. And that will likely mean fewer — but larger — platforms competing with each other.

This is Netflix’s core challenge. From being seen as a tech giant, they have shrunk so much on the stock market that they could plausibly be a takeover target themselves.

Big players like Apple and Amazon still treat streaming as a small component of a much larger business. Apple doesn’t need to make money on TV shows as long as people keep buying iPhones. Amazon is happy if streaming brings in more Prime members. As one example, Amazon completed its acquisition of film studio MGM for $8.5 billion this spring — barely a third of what Amazon pulls in annually from Prime subscriptions alone.

Netflix’s quarterly results on Tuesday evening were a step in the right direction. Combined with the new advertising strategy, they could mark a fresh start for the company. But as competitors merge and grow ever larger, Netflix stands alone on the sidelines. Being independent was once a competitive advantage. Now it looks more like a risk.