Streaming giant Netflix (NASDAQ: NFLX) has seen its share price tumble on Wednesday after investors were shocked by a nasty surprise in the company’s latest earnings update.
So, what happened and why are shareholders panicking about it?
Why are Netflix Shares Down?
The long and short of the situation is that investors are scared that Netflix is running out of momentum. That’s because the company’s latest earnings showed that its subscriber numbers had fallen by around 200,000.
While this is a drop in the ocean compared to its overall subscriber base of 221.6 million people it is the first quarterly drop in subscribers in over a decade.
This doesn’t stop there either.
That’s because Netflix also acknowledged that it expects to lose around two million subscribers in the next quarter. As such, investors are scared that the streaming giant is running out of steam. So, what’s going on under the surface?
Why are NFLX Subscribers Leaving?
Hold on tight, because are a lot of points to cover in answering this question.
Looking at the wider picture, it’s key to remember that the pandemic and lockdown-style restrictions probably had a hand in boosting subscriber numbers over the past couple of years. People were trapped at home with little else to do other than binge their way through Breaking Bad.
But now most Western nations have returned to normality and people have less time to sit at home watching TV. Additionally, cost of living increases coupled with subscription price hikes may have led an increasing number of members to bin their subscriptions in order to save money.
Finally, the company lost 700,000 subscribers when it ceased operating in Russia in response to the country’s invasion of Ukraine. Beyond these factors, Netflix has identified a couple of other things it sees as the issues it is facing.
A letter to shareholders explained:
“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.”
It’s not exactly surprising that account sharing has been identified as a problem. It goes hand in hand with the issue of competition as, with so many subscription media services around these days, it’s fairly common for people to share accounts so that they can enjoy unfettered access to the likes of Netflix, Disney+ and Spotify without having to pay full whack.
Perhaps that’s why it has been equally unsurprising to see other streaming services’ share prices slump on Wednesday. Netflix’s earnings have been identified as a sign that all is not well in the world of streaming.
How is Netflix Combatting the Problem?
Netflix sounds optimistic that it can more effectively monetize “multi-household sharing” in the future, so perhaps this isn’t the massive blow to streaming services that it immediately appears to be.
Indeed, the company’s earnings call even saw CFO Spence Neumann state that subscriber numbers were likely to become “less relevant” in the future because of monetization strategy.
There’s nothing concrete on what this strategy might look like yet, but it is trialling a system in some Latin American countries where account holders must pay more to add multiple profiles.
It’s also worth noting that the company remains over the moon with its engagement stats from viewers. If the platform can continue to pump out quality content that excites viewers, an effective account sharing monetization model could make today’s major drop in share price seem like foolish panicking.
However, that remains a big ‘if’.
If investors instincts are right and Netflix’s news heralds trouble for other streaming services, we can expect a slew of new pricing models over the coming months. Time will tell which of these strategies will be successful.
