As he built Netflix into the world’s largest streaming service, one of Reed Hastings’ management mantras was for his employees to “tell the emperor when he has no clothes.”
With Netflix losing nearly two-thirds of its market value since November and analysts likening it to a dotcom crash, Hastings on Tuesday finally heeded its own advice and acknowledged that strategy Your corporate strategy could be seriously flawed.
For an hour on Tuesday, the Netflix founder abandoned his long-cherished principles, reorienting a media group that changed Hollywood to deal with leaner times of slow growth and spending restrictions.
Password sharing? In 2016, Hastings quipped “we love people who share Netflix”. Now, he plans to suppress the practice; Hastings estimates 100 million people have shared the account.
Competition? For years, he dismissed the threat posed by Disney, Apple and HBO, insisting Netflix’s biggest competitors were Fortnite, YouTube, and “sleeping.” On Tuesday, he acknowledged Netflix needed to “raise the bar” because its rivals already have “some very good shows and movies.”
But perhaps the most obvious is about advertising. Always defending Netflix as an ad-free zone that allows viewers to “relax” without being “taken advantage of,” Hastings has opened the door wide open to monetize marketing.
Casually declining to change strategy during a call with analysts, Hastings announced Netflix will be working on a cheaper, ad-supported version of its service “in the next year or two.” “.
And spend? Netflix single-handedly created a template for streaming in which the stock market rewards it for spending more money. The company burned cash for years while investors applauded rapid subscriber growth and committed to constantly launching new TV shows and movies. For the first time, the company on Tuesday said it would limit spending on content.
Michael Nathanson, an analyst at MoffettNathanson, summed it up: “It was shocking. “These people sound like any other management team that still have no answers.”
The confrontation was an incredible moment for a company that, while its registration numbers skyrocketed at the height of the pandemic, was confident enough to begin proactively canceling accounts for those who don’t. don’t use them.
After the stock market’s historic run as one of the ‘FAANG’ big tech companies (Facebook, Apple, Amazon, Netflix and Google) skyrocketed to a valuation of nearly $310 billion in October , it fell back to $95 billion. Share in Netflix drops more than 38% on Wednesday alone.
“We’ve seen a company go from rapid growth to instant growth purgatory,” says Nathanson.
One of the most painful decisions for Hastings was probably about advertising.
His opponents have long predicted Netflix will eventually counter the anti-ad stance that Jason Kilar, a former Warner Media executive, recently compared to a “religion.” But few imagined it would come so soon.
“How you get a billion [subscribers] Kilar said. “[Netflix] would absolutely come to that conclusion. ”
Morgan Stanley expects that over the long term, Netflix could make “billions” from advertising, estimating that advertising generates about $3 billion in revenue per year for rival service Hulu.
But the bank’s analysts also questioned whether the option of offering cheaper subscriptions would boost the company’s revenue, as it has convinced 75 million households in the US and Canada to pay the average. 15 dollars a month on average. “As it moves customers to the ad-supported tier at a lower price, it can generate a higher overall [revenue]? This is less obvious”.
Mark Read, executive director of advertising group WPP, said the change in strategy reflects the need to reach new customers and “clear limits to the growth of subscription-only models”.
“History has shown that successful media companies have both subscriptions and advertising,” he said. “No doubt about it pressure on household budget as well as the growing number of subscriptions has focused on the consumer’s mind. ”
The challenge for Netflix is to introduce an ad-supported membership that doesn’t fit into an existing subscriber base or spend too much time and money building an ad business that it once had. it used to be considered a distraction.
After years of leading the market in video subscription services, Netflix had to adjust to the role of latecomers in ad-sponsored streaming, learning from Disney, Discovery, Paramount, and NBC. A former Netflix executive said: “There was never any fear that we were in trouble. “The feeling is: we are ahead of leap years.”
It now faces stiff competition from the world’s biggest tech and media companies, which have had success with blockbuster TV shows like Apple’s “Ted Lasso” and “Succession.” ” by HBO.
Among some investors and analysts, there is a feeling that Netflix’s lavish spending will yield better programming. “If you spend $18 billion on content, I like to think you can convince people to join your streaming platform,” said Netflix’s top 10 shareholders.
But its share price slump is worrying the entire entertainment industry, because the largest US media conglomerates have earned more than 100 billion dollars this year alone spent on content trying to catch up with Netflix’s model.
Now, Hollywood is questioning whether Netflix execs overestimated the size of the streaming market.
Netflix has 222 million paid subscribers, and Hastings has told investors his “total addressable market” is any household in the world with internet access – possibly is a billion subscribers. He emphasized: There is a lot of room for growth and ample space for new competitors.
But as its growth shows signs of slowing down, analysts are punctuating these optimistic assumptions. In light of questions of affordability and global access to digital payment systems, Nathanson estimates that the “real” addressable market is closer to 400 million.
Equally worried, he questioned whether Netflix had reached full saturation in the US and Canada, where the company revealed on Tuesday that an additional 30 million people are sharing accounts over 75 million. existing registrants. The number of US pay-TV subscribers during the peak of television in 2011 was around 100 million, suggesting that Netflix may have tapped its biggest market yet.
This is bad news for other media groups as their valuations have been compared on Netflix. Shares of Warner Bros Discovery fell 5% on Wednesday, while Disney fell 4% and Paramount Global lost 10%.
Rich Greenfield, an analyst at Lightshed Partners, notes that the irony is that streaming champions like Netflix and Disney are now using advertising, a mainstay of their old media strategy, to revive their business.
“It would be scary if the only way to revive growth was to offer cheaper products that worsen the consumer experience, essentially making it look like the linear TV experience is dying,” he said. gradually die.
Additional reporting by Harriet Agnew
