New York (CNN Business) – Netflix’s bad 2022 just got worse.
After shares tanked earlier this year because of concerns over its subscriber growth, the streaming leader said that it lost subscribers when it reported first quarter earnings on Tuesday.
Netflix (NFLX) now has 221.6 million subscribers globally. It lost 200,000 subscribers in the first quarter of 2022, the company reported on Tuesday. The service was expected to add 2.5 million subscribers, and it said it expects to lose another 2 million subscribers in the second quarter of 2022.
The report sent the stock down as much as 25 percent in after-hours trading.
Netflix’s fourth quarter profit was $1.5 billion, down from $1.7 billion in the year-earlier quarter. Revenue jumped 9.8 percent, to $7.8 billion.
It cannot be overstated just how bad of a report this is for the king of streaming right now. The company’s stock has fallen more than 40 percent year to date, and coming into the earnings there was a lot of concern from investors regarding its growth — concerns that were realized Tuesday with Netflix missing not only the low bar of its own expectations but losing thousands of subscriptions to boot — something that hasn’t happened at the company in more than a decade.
What happened?
In its letter to investors, the company said that since it launched streaming in 2007, the company has “operated under the firm belief that internet-delivered, on demand entertainment will supplant linear TV,” But, it added, in the near term “we’re not growing revenue as fast as we’d like.”
Netflix said that the pandemic “clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the Covid pull forward.”
But there are many different factors behind its subscriber stagnation, including competition from traditional media companies that have gotten into the streaming market in recent years, as well as widespread password sharing.
“In addition to our 222 million paying households, we estimate that Netflix is being shared with over 100 million additional households, including over 30 million in the [United States/Canada] region,” the company said.
The company also blamed “macro factors” that are affecting many companies right now, such as “sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from COVID are likely having an impact as well.”
Netflix said that pulling out of Russia cost the company 700,000 subscribers.
The company’s bad report is likely to roil the streaming market given that so many other firms have changed their business strategies to compete with Netflix.
Disney (DIS), for example — one of Netflix’s biggest rivals — was down roughly 5 percent Tuesday evening.
What now?
Netflix told investors Tuesday that it plans to turn the tide by doing what it’s always done: Improving the service.
“Our plan is to reaccelerate our viewing and revenue growth by continuing to improve all aspects of Netflix — in particular the quality of our programming and recommendations, which is what our members value most,” the company said.
The company added that it’s “doubling down on story development and creative excellence” and that it launched the “double thumbs up” tool that will allow members to “better express what they truly love versus simply like.”
Netflix also said it will focus more on “how best to monetize sharing” in terms of passwords.
“Sharing likely helped fuel our growth by getting more people using and enjoying Netflix. And we’ve always tried to make sharing within a member’s household easy, with features like profiles and multiple streams,” the company said.
“While these have been very popular, they’ve created confusion about when and how Netflix can be shared with other households.”
The company said last month that over the last year, it’s been working on ways to “enable members who share outside their household to do so easily and securely, while also paying a bit more.”
“While we won’t be able to monetize all of it right now, we believe it’s a large short-to mid-term opportunity,” they said.
Another place that could help increase revenue and attract more subscribers for the service is advertising.
Netflix CEO Reed Hastings has always been allergic to the idea of having commercials on the platform, but on Tuesday’s call with analysts he mentioned that it could be a possibility in the future.
“Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription. But as much as I’m a fan of that, I’m a bigger fan of consumer choice,” Hastings said on the post-earnings call. “And allowing consumers who like to have a lower price, and are advertising tolerant, get what they want makes a lot of sense.”
He added that the company is looking at that now and trying to figure it out “over the next year or two.”
“Think of us quite open to offering even lower prices with advertising,” Hastings said.
Despite the dramatic growth slowdown that puts its strategy into question, Netflix remained defiant.
“This focus on continuous improvement has served us well over the past 25 years,” Netflix said. “It’s why we are now the largest subscription streaming service in the world on all key metrics: paid memberships, engagement, revenue and profit.”
