Advanced Television

Netflix: Analyst reactions; ‘don’t act like a monopoly’

April 20, 2022

By Colin Mann

Noting Netflix’s significant drop in subscribers, partly in the shape of 600,000 households de-subscribing in the US and Canada following a price increase, Teresa Cottam, Chief Analyst at Omnisperience, suggests that it’s not subscribers that are the problem, arguing that Netflix is just bad at bundling, pricing and charging.

“Rather than consider whether those price rises were wise in the face of the biggest household squeeze in a decade, Netflix instead blamed its subscribers,” she says. “It estimates that 100 million households are breaking its rules on sharing passwords – something it vowed to crack down on while warning more losses are coming.”

“Boss Reed Hastings said: ‘When we were growing fast, it wasn’t a high priority to work on [account sharing]. And now we’re working super hard on it’,” she reports.

According to Kantar, in the UK alone, 1.5 million households cancelled streaming subscriptions in the first three months of 2022 as the cost of living increased. The firm said more than a third of those were directly due to ‘money saving’.

“We spend our working lives here at Omnisperience trying to get CSPs to become more customer-centric and think about what customers actually want,” she advises. “This is, after all, the experience economy. While CSPs are slowly waking up to how important this is to their business models in both the B2B and B2C sectors, and moving beyond lip service to make meaningful moves on customer centricity, it is staggering to hear a retailer of entertainment – because that’s what Netflix is – saying that they will carry on with a ‘growth’ strategy that’s causing their subscriber base to contract in their biggest markets.”

“The hubris of thinking you can put up prices, constrain customers with T&Cs they don’t agree with, and behave like you have a natural monopoly is staggering. Instead of trying to figure out how to stop households sharing their passwords with others, maybe they should consider how to make their pricing simpler, more customer-centric and more affordable?”

“To be fair, part of this is outside Netflix’s control. The media market still hasn’t come up with a simple, global pricing structure because of the antiquated and labyrinthine rights system.”

Cottam notes findings from Rebecca Moody comparing the number of titles available against the price paid. Her team found Slovakia, Bulgaria, Lithuania, Estonia and Latvia have the biggest libraries; Turkey, Pakistan and India get the best value for money, with above-average libraries and cost-effective pricing. “It’s no wonder that this is where Netflix is experiencing growth,” she adds.

“This situation is even worse when you look at cost per title. While it’s often thought that the US has the most titles in order to justify its hefty price point, this isn’t true. It currently has 5,800 titles compared to Slovakia’s 7,400 and Pakistan’s 5,800. When considered at price per title, the US pays 76 per cent, 72 per cent and 70 per cent more than Pakistan. Affordability then becomes an issue: wages in Pakistan are lower on average than in the US, UK or Slovakia. But this can also be misleading because the real killer is discretionary spending – what households have left to spend after paying taxes and essential bills – and this is what’s under sustained pressure in the US, UK and other European countries,” she observes.

“Our opinion is that open sharing of passwords is wrong and illegal, but if you pay for five slots and five people are using them then who is Netflix to police where these people live and what constitutes a ‘household’. Netflix also has to get over its self-image as a utility derived from 20 years of easy growth. Electricity is a utility. Broadband is a utility. Bridgerton is not,” she asserts.

“Think about it, Netflix is obsessed that you might have given one of your five available slots to granny, but hasn’t got its head around personalised pricing, unbundling or pay-per-view. Amazon, in contrast, offers far more choice in terms of how to buy content. Neither have innovated around personalised pricing or the concept of the modern household. And Netflix’s assertion it will stop password sharing is at odds with its interest in introducing advertising – the bigger the audience, the bigger the advertising revenues. The inevitable conclusion is that streamers such as Netflix are even worse at bundling, pricing and charging than CSPs, and even further behind when it comes to bundling and pricing strategies. And that takes some doing,” she admits.

“This is not the end of Netflix,” says Paolo Pescatore, TMT Analyst at PP Foresight. “It feels like a reality check for a company that is trying to strike a fine balance of retaining subs, while increasing revenue.”

According to Pescatore, a combination of factors have come together against Netflix.” Restrictions have eased with people spending more time outside coupled with the cost of living crisis have had a negative impact on the company. Let’s not forget the market is now awash with too many streaming media services chasing too few services.”

“Netflix still remains the benchmark and is at a different phase of growth. While rivals are still in stealth mode, they will eventually see challenges in acquiring new subs. The company needs to ensure it stays as an indispensable service in people’s homes. Ultimately this can be achieved with blockbuster programming.”

“Increasing revenue and driving engagement must be a priority. There are plentiful opportunities to offer other features, services and billing options. There are still millions of subscribers to acquire and in particular the emerging markets,” he suggests.

“Password sharing remains an ongoing problem for all streaming media services. Clamping down might help but there might not be a one size fits all solution. There will be disgruntled subscribers who may cancel altogether. Netflix will have to experiment with different price tiers to cater for diverse audiences. In the first instance a low cost AVoD offering might help convert freeloaders,” he advises.

Commenting on the results, Patrick Morrell, Director of Strategic Publishing and TV Development at The Trade Desk, said: “Netflix’s quarterly results are increasingly focused on subscriber numbers. After the boom in new joiners during the pandemic lockdowns, the numbers have fizzled. These results have been particularly impacted by the interruption of its business in Russia and booming inflation across the globe, which is leading many consumers to reassess their monthly outgoings as streaming subscriptions are considered a luxury ‘extra’.  Netflix continues to create and buy a variety of popular content – but the cost of doing so is high and growing, with Netflix feeling the same inflationary squeeze as its subscribers. The company has been clear that increased production costs will be reflected in increased subscription prices. The Trade Desk’s research last year found that £20 was the limit the majority of UK consumers are willing to spend on subscription services – and with Netflix’s standard package costing over half that, many will be questioning if they should continue subscribing.”

Morrell concluded: “As household budgets tighten, ad-funded TV is an increasingly popular choice and one that makes good sense for streamers to offer. Discovery is leading the way with its recently announced ‘Ad-lite’ product, while Disney has announced plans to offer an ad-supported plan later this year in addition to its standard paid-for service. We expect to see a proliferation of these types of hybrid offerings across the streaming sector in the next 12 months – the question is, will Netflix leave the strategies of its competitors unanswered?”

Dominic Sunnebo, Global Insight Director, Kantar, Worldpanel Division, commented: “Yesterday was undoubtedly tough for Netflix, reporting its first ever loss of subscribers, and providing forward guidance that it expects to lose an additional 2 million subscribers in Q2. Netflix decision to pull out of the Russian market as a result of the war in Ukraine cost it 700k subscribers, and will be tolerable to investors as unavoidable, but even without the Russian subscriber loss, Netflix missed its own subscriber growth guidance by a significant margin. The reasons behind this have been building for some time; namely intense competition and inflation putting downward pressure on households disposable income. With shares inevitably plunging, Netflix sought to reassure investors by suggesting it will focus on cracking down on password sharing and seek to generate revenue from this, whilst also for the first time opening the door to an ad supported model. Netflix has been trialling a scheme for monetising password sharing in South America, and suggested that up to 100m HHs gain access to Netflix via this method.”

“It’s a big number, designed to buoy worried investors, but converting even a small fraction of these to full paying customers is not an easy task, particularly so when consumers are looking for ways to save money, not spend more. If the schemes to counter password sharing move too fast and too aggressively, it also risks alienating a potential future audience -many who password share beyond the household are not actually aware they’re breaking the terms of their subscription. The comment about investigation into an ad supported model are the most important -Netflix said it has shied away from this to date, citing the ease of a fully ad free model as its preferred choice. However, Netflix already offered multiple tiers to its service, across number of screens and definitions and in most parts of the world consumers are very familiar with ad supported models. If Netflix does go down this route, it’s game changing, not just for Netflix and its ability to generate a very significant new revenue stream, but also for the world of advertising. Netflix has reach close to that of traditional TV in a number of major markets around the world  -it’s power to enact large scale change here should not be underestimated.”

“Netflix reaction to their first subscriber loss is very reactive -this day has been coming for some time and strategies needed to be put in place earlier to avoid rushed implementation. The Netflix business does however remain sound, with a mostly highly loyal and engaged customer base,  but as this subscriber base is staring to hurt from economic pressures, Netflix needs to offer alterative models to support the changing realities,” he concluded.

Tammy Parker, Principal Technology Analyst at GlobalData, comments: “Netflix has shied away from acknowledging the changing competitive landscape and avoided looking in the mirror to see where it needs to improve. Netflix’s Q1 earnings letter to shareholders cited external factors that it says are creating growth headwinds, but most of these are far from being new issues and only serve to highlight the company’s own internal weaknesses.”

“The five notable areas where Netflix remains vulnerable include competition, pricing strategy, content investment, password sharing and expansion into gaming. Netflix has been, until recently, incredulous regarding the threats posed by new streaming competitors like Disney+. This left Netflix unprepared, and now it is scrambling to react. Netflix should understand that many current and former customers have ‘been there, done that’ when it comes to Netflix and are interested in trying out the bevy of competing streaming services. Plus, there is an untapped pool of younger consumers who may never sign up for Netflix.”

“Additionally, Netflix’s pricing strategy must evolve, especially as inflation eats away at consumers’ wallets, making them choosier about their streaming subscriptions. Netflix raised prices across all plans in the US during January, which seems to have been especially poor timing. Furthermore, Netflix’s plans are poorly differentiated, as they all offer the same content and only vary in terms of video quality and number of screens supported. With Disney+ planning to launch a cheaper, ad-supported tier this year, it’s time for Netflix to reconsider its opposition to that approach.”

“Another challenge is that Netflix needs to maintain heavy content investment, not only in its mature markets like the US but also newer markets worldwide where it must support development of regionalized content. However, the multiple Academy Awards won last month by Apple TV+ film CODA highlight the fact that rival streaming services are also investing in quality programming and are positioned to outbid Netflix on the next hit shows.

“Netflix is correct to cite password sharing as a detriment to its growth. Password sharing became an issue as soon as Netflix refocused its business model from mailing out CDs to streaming content, so this is not a new problem. In fact, password sharing is a threat across the streaming industry and does not only impact Netflix. Any success Netflix has in shutting down unauthorised password sharing will be closely watched and potentially copied by every streaming player.

“Finally, Netflix’s expansion into mobile video games shifts focus from its core competency in passive entertainment to an active entertainment sector in which it has no experience. It remains to be seen whether getting its claws into the Exploding Kittens franchise will help Netflix generate significant interest from gaming-focused Generation Z and other age groups.”

Netflix is clearly losing dominance in the subscription video on demand (SVoD) market, according to GlobalData. The company notes that  the streaming company’s market share in the US was 25 per cent, and this will fall to 16 per cent by 2026.

Charlotte Newton, Thematic Analyst at GlobalData, comments: “It is clear that we are now post-peak stream as life goes back to normal. Streaming services are either throwing money at the problem, chasing a dwindling number of subscribers, or (in Netflix’s case) cutting back on content spend, which was its USP. Streaming services need to adjust expectations, and improve their offerings to prevent further haemorrhaging of subscribers and to compete in an increasingly fragmented SVoD market.”


Newton continues: “People are feeling the pinch with rising cost of living and must be more selective about what they choose to spend their money on. Subscription-based streaming services are just one example of where people may choose to cut costs to make ends meet. It is not just Netflix taking a hit. Disney + cancellation rates have tripled since the beginning of 2022, compared to Q4 2021.

“Streaming services are seen as a luxury. Fewer people will want to have more than one subscription, and will base their decision on content offerings. Netflix have delivered well on this front, with hits like Bridgeton, Ozark, and the Adam Project. However, what keeps many viewers is the ability to rewatch favourites like Friends over and over again. The streaming service facing strong competitors who are more willing to spend on content and buy fan favourites. In essence, they will have to diversify their offerings, produce quality content and keep the classics, to be considered worth the monthly spend.”

Francesca Gregory, Thematic Analyst at GlobalData, comments: “Amid tumbling subscriber numbers, Netflix finds itself in an entirely different landscape to its pandemic heyday. Netflix is considering shifting to ad-based models and cracking down on account sharing. Although this would improve revenues, these shifts will potentially compromise user experience, which has been a central tenet to Netflix’s past success. Netflix risks losing its point of differentiation in the increasingly crowded streaming market. As the cost-of-living crisis bites and competition intensifies, Netflix will need to balance revenues with a seamless user experience; or it could witness a mass exodus of subscribers from the platform.”

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