The COVID-19 pandemic served streaming giant Netflix well, yet the post-pandemic era has brought unexpected challenges with a steep drop off in subscribers. Can co-founder, chairman and co-CEO Reed Hastings turn the ship around?
Netflix Chairman and Co-CEO Reed Hastings can be forgiven for having had some sleepless nights this summer. In April, a drop of just 200,000 users— less than 0.1 percent of Netflix’s total customer base—was enough to send Wall Street panicking, with shares in the company plunging more than 30 percent. The loss of subscribers and talk of various plans to revive business “change the historically simple story” of Netflix’s solid success, Wells Fargo analysts said at the time, adding, “The new outlook is clear as mud.” Yet when results for the second quarter were announced on July 19, they were far less worse than the pessimists had predicted. Yes, there was a drop of 970,000 users, but that was significantly fewer than the 2 million some had been anticipating. Furthermore, Netflix announced plans for how to claw back revenue moving into 2023.
Yet Hastings, who built the firm from the ground up with business partner Marc Randolph, remains realistic: “Our views are a little different because our numbers are a little different,” he said on Netflix’s Q2 earnings call. “Covid (…) boosted us a lot in 2020. In 2021, I think we thoughtfully said it was mostly pull forward… But now, coming into 2022, that doesn’t really hold.”
Netflix, Inc. is an American subscription streaming service and production company. Launched on August 29, 1997, it offers a film and television series library through distribution deals as well as its own productions, known as Netflix Originals. As of March 31, 2022, Netflix had over 221.6 million subscribers worldwide, including 74.6 million in the United States and Canada, 74.0 million in Europe, the Middle East and Africa, 39.9 million in Latin America and 32.7 million in Asia-Pacific. In 2021, the company enjoyed global revenue of $29.7 billion.
NETFLIX: A STREAMING EMPIRE
Long before the pandemic began, Netflix appeared to be an unstoppable force in the media and entertainment industry, ranking alongside Facebook, Amazon and Google as one of the FANGs—tech giants notable for their extraordinary growth in the twenty-first century. Like those other companies, Netflix also had an extraordinary story. Reed Hastings and his business partner Marc Randolph founded the firm in Scotts Valley, California, in August 1997. Inspired by Amazon, they conceived the idea of a DVD rental company, which had first come onto the U.S. market that same year.
Hastings, a computer scientist and mathematician, invested $2.5 million from the sale of his prior company, Pure Atria, into the mix and Netflix launched in 1998 with only 30 employees and 925 titles available—almost the entire catalogue of DVDs at the time. Shortly after, Jeff Bezos offered to acquire Netflix for between $14 and $16 million. Fearing competition from Amazon, Randolph at first thought the offer was fair but Hastings, who held a major 70% of the company, turned it down on the plane ride home.
In January 2007, the company launched a streaming media service, introducing video on demand via the Internet. The company had for some time considered offering movies online, but it was only in the mid-2000s that data speeds and bandwidth costs had improved sufficiently to allow customers to download movies from the net.
In January 2016, at the 2016 Consumer Electronics Show, Netflix announced a major international expansion of its service into 130 additional countries. It then had become available worldwide except China, Syria, North Korea, Kosovo and Crimea.
“At Netflix, we think you have to build a sense of responsibility where people care about the enterprise,” Hastings has said about the mindset at the company. “Hard work, like long hours at the office, doesn’t matter as much to us. We care about great work.”
The number of Netflix subscribers grew to 222 million during the COVID-19 pandemic as people stayed home under quarantine. Yet that unexpected growth surge soon began to tail off. Overall, Netflix added 18.2 million members in 2021, which was roughly half the number who subscribed the prior year. “While retention and engagement remain healthy, acquisition growth has not yet re-accelerated to pre-Covid levels,” Netflix said at the beginning of the year, pointing to “Covid overhang and macro-economic hardship” in parts of the world like Latin America.
The company also admitted that new competition from the likes of Disney, Apple, Amazon and HBO was starting to have an impact. “Consumers have always had many choices when it comes to their entertainment time—competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering,” Hastings said in a letter to shareholders in January. “While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched.”
In response, Netflix has been spending billions of dollars on content to keep viewers interested. Notable hits during the last three months of last year included a new season of The Witcher fantasy television series and the political satire Don’t Look Up, while the return of the incredibly popular original franchise Stranger Things this spring provided another much welcome boost. Nevertheless, Netflix, which recently raised its subscription price in the US and Canada, is facing rising costs and other challenges post-pandemic.
TURNING THE SHIP AROUND
The loss of just 970,000 subscribers in the second quarter of 2022 was nevertheless a significant improvement from Netflix’s own April prediction that it would lose 2 million global paid subscribers. The firm saw declining sessions and time-spent viewing in April and June, but May was up with the debut of “Stranger Things 4: Volume 1,” a self-produced series which has become a household name.
Furthermore, Netflix announced in April that it was planning on rolling out an ad-supported tier after years of resisting the move. In mid-July, it named Microsoft as its partner for the new service. During the company’s Q2 earnings call, Hastings said the rollout would begin in 2023 and provided the following background for shareholders: “We’ll likely start in a handful of markets where advertising spend is significant. Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering.”
On the earnings call, Hastings also offered perspective on adjustments to Netflix’s cost structure given its current rate of revenue growth. “This resulted in approximately $70 million of severance costs and an $80m non-cash impairment of certain real estate leases primarily related to rightsizing our office footprint,” he highlighted. “Excluding these items totaling $150 million, and the F/X impact of the stronger US dollar since our April report, operating profit and operating margin were slightly ahead of our guidance forecast.”
“As we have said in the past, over the medium term, we intend to continue to adjust our business as appropriate given the relative strength of the USD to protect our operating margin and try to avoid immediate actions that we believe could be detrimental to the business,” Hastings elaborated on the headwinds of inflation.
“First and foremost, we need to continue to improve all aspects of Netflix,” he added. “This focus on improving our core service has served us well over the past 25 years, and remains our north star to drive continuous growth. It’s why we strive for an even better content, marketing and product experience.”