While Netflix performed better than expected during the second quarter, its subscriber exodus continues to raise questions about streaming’s future.
After losing 200,000 subscribers in the first three months of 2022, Netflix said in its second-quarter earnings report on Tuesday that it shed nearly an additional 1 million subscribers. The total was less severe than Netflix’s April projection of 2 million, a result that gave the company a much-needed boost on Wall Street. Netflix’s stock price surged nearly 8% in after-hours trading following the report’s release.
Despite the jump, Netflix shares are still down nearly 65% for the year (compared with the S&P 500’s 18% dip), a slump that’s wiped out roughly $70 billion of the streamer’s market capitalization and prompted shareholders to file a lawsuit alleging that the company misled investors about declining subscriber growth. Other streaming stocks also took a hit as a result of Netflix’s poor performance, showcasing how the largest global streaming platform has an outsize influence on the sector as a whole. Among the major streamers, Netflix is also the only company that doesn’t have a bigger business with other revenue streams to fall back on.
In response to its financial woes, Netflix laid off hundreds of employees, moved to crack down on password sharing between households, and confirmed that it would begin testing an ad-supported, lower-priced subscription tier after years of resisting the move. Now, amid rising concerns about the business of streaming, Netflix said in its letter to shareholders that it’s focused on a number of efforts aimed at increasing subscriber totals and generating new revenue.
“Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content and marketing as we’ve done for the last 25 years, and to better monetize our big audience,” the letter said.
Ads are still on the way
After announcing earlier this month that it’s partnering with Microsoft to bring commercials to its service, Netflix said on Tuesday that it’s targeting an early 2023 launch for its new ad-based plan. The ad-tier will likely first launch in a “handful” of markets with significant advertising budgets. “While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues),” the company said.
Ads are becoming more of the rule than the exception in the streaming world. Netflix competitors like Hulu and HBO Max already offer ad-based plans that are cheaper than their commercial-free services, while Disney+ announced in March that it would be rolling out an ad-supported subscription tier in late 2022.
Quality content is key for Netflix’s future
Netflix’s long-term success may hinge on its ability to produce quality and buzzworthy original programming that subscribers view as can’t-miss.
The release of Stranger Things season 4, which logged the biggest premiere weekend ever for an English-language series on Netflix and earned 1.3 billion hours viewed in its first four weeks to become Netflix’s most-watched season of English TV, was a necessary boon for the streamer. Netflix’s letter noted that, more than a decade into its transition from licensed second run content to mostly Netflix originals, the draw of its service relies on delivering shows and movies that members are “talking about in large numbers.”
However, even with shows like Stranger Things, Squid Game, and Ozark racking up Emmy nominations this year, Netflix’s 105 nominations are second to the 140 received by rival HBO and its accompanying streaming service, HBO Max. Other competitors are also showing signs of rising in the prestige TV ranks, with Hulu snagging a record 58 nominations (more than doubling its total from last year) and Apple TV+ scoring 52 of its own.
The forthcoming July 22 release of the $200 million-plus action thriller The Gray Man, Netflix’s most expensive movie to date, may serve to show whether the company’s reported new mantra of “bigger, better, fewer” will pay off moving forward.
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