Netflix said its decades of subscriber growth came to an end in the first quarter, admitting that many markets are “getting harder to attract members,” causing its shares to plummet 25 percent in after-hours trading.
The video stream Pioneer shocked investors by forecasting that its subscriber base would fall by another 2 million to about 219.6 million in the current quarter, after falling about 200,000 in the first quarter. Investors had expected an increase of 2.6 million subscribers.
Netflix partly blamed the dramatic slowdown on signs of saturation in its major markets. But it also recognized the impact of increasing competition from streaming services launched by traditional media groups like Disney, Warner Bros Discovery and Paramount. Together, these factors are creating “headwinds for revenue growth,” the company said.
“We definitely sense a higher level [market] penetration . . . and increased competition,” said Ted Sarandos, Co-CEO.
Netflix’s report marks a dramatic change in fortunes for a company that has shown rapid growth over the past 10 years and has been booming in the depths of the Covid-19 pandemic. When it showed signs of slowing late last year, company officials blamed “noise” from the ongoing impact of Covid-19.
“This was a change of tone,” said Jefferies analyst Andrew Uerkwitz, who noted that Netflix rarely even acknowledged that it has faced competition in the past. “It sounds like they’re in rebuild mode.”
Netflix said it would try to spur growth by improving the “quality of our programming” and trying to drain some of the 100 million households that share other users’ accounts.
Reed Hastings, co-CEO, said account sharing, which has always been an issue at Netflix, is now coming into focus. “When we were growing fast it wasn’t a high priority, but now we’re working very hard on it,” Hastings said. The company is testing how joint account fees are charged in markets like Chile and Peru.
Hastings also said Netflix plans to launch an ad-supported streaming service – an idea he has long resisted. “That’s something we’re looking at now and will roll out over the next year or two,” he said. “It works for Hulu and Disney does it. These companies figured it out.”
The report is likely to increase investor concerns about the cost of the streaming wars — and the potential size of the profits at stake. Netflix will spend $19.2 billion on content this year, Uerkwitz estimates, as it competes with Amazon, Apple, Disney, and others who are investing heavily in streaming.
Spencer Neumann, Netflix’s chief financial officer, said the company will “cut back some of our spending growth on both content and non-content” over the next 18 to 24 months due to slower revenue growth. “But we will continue to invest aggressively in this long-term opportunity.”
Netflix raised prices in the US and Canada, which cost it about 600,000 subscribers but was still “clearly revenue-positive,” the company said. Streaming in Russia was also halted after the invasion of Ukraine, costing around 700,000 subscribers.
This is the second time Netflix has surprised investors this year, after rocking markets in January with its forecast that subscriber growth would slow significantly in 2022. The company’s shares are down about 40 percent this year.
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