Netflix’s Stumble Could Be a Warning Sign for Streaming Industry

Many entertainment executives, fed up with catching the Silicon Valley interlopper, are waiting for Netflix to arrive. But this did not happen the way they had hoped.

Netflix said this week that it lost more subscribers than signed up in the first three months of the year, reversing a decade of steady growth. Shares of the company fell 35 percent on Wednesday as it cut its market capitalization by about $ 50 billion. The pain was shared across the industry as stocks of companies like Disney, Warner Bros. Discovery and Paramount also declined.

Netflix blamed a number of issues, from competition to the decision to leave all its subscribers in Russia due to the war in Ukraine. For entertainment executives and analysts, the moment is decisively felt in so-called streaming wars. After years of effort, they may see an opportunity to land on their huge rival.

But Netflix’s spectacular reversal has also raised a number of questions that will have to be answered in the coming months as more traditional media companies rush to subscription businesses that are largely created by Netflix. Is there such a thing as too many streaming options? How many people are really willing to pay for them? And could this business be less profitable and a lot less credible than the industry it has been doing for years?

“They switched from the sound business model to the inappropriate model,” said Barry Dealer, an experienced entertainment executive, in an interview Wednesday, referring to several legacy companies that have recently launched streaming options. “I guess today they say, ‘Maybe the trees don’t grow in the sky.'”

Concerned about declining movie theater ticket sales and broadcast television ratings, the media industry is reshaping itself on the fly to go all-in on streaming and compete with Netflix. Disney has invested billions. Discovery Inc. And WarnerMedia completed the merger this month to better compete with the streaming Behemoths. CNN also released a streaming version of itself, which has so far attracted an unexpected number of subscribers.

But Netflix’s sudden problems show that those investments come with a lot of risks. Rich Greenfield, an analyst at LightShade Partners and a longtime streaming booster, said the streaming market could still be huge in the long run, but the next few years could be difficult.

“No matter, it seems a lot less profitable, and that’s a problem for everyone,” he said. The intense competition to create original content leads to fewer subscribers and lower costs, resulting in lower profits for everyone.

Another concern, some analysts say, is the so-called churn rate. Kevin Westcott, vice chairman of consulting firm Deloitte, said customers are increasingly paying for streaming services and the possibility of canceling the service when a favorite show ends. According to Deloitte, 25 percent of U.S. subscribers have canceled a streaming service to re-subscribe in just one year.

Mr. Westcott said.

Netflix issues will put pressure on Disney, which will announce the number of subscribers on May 11. If Disney’s figures fail to live up to expectations, the signs of trouble surrounding the streaming business will grow louder.

There were also fears among Hollywood’s talent agents on Wednesday that the Netflix gravy train might slow down and the company’s willingness to pay for scripts and talent deals could disappear. It was the same for the producers. Netflix has spent millions of dollars in the last five years seeking an Academy Award. He has not yet won an Oscar for Best Picture, but his commitment to making a decent film has been praised.

“We will be affected if the new reality forces us to cut their $ 17 billion-a-year programming budget,” said Michael Shemberg, whose four-part documentary on the Three Mile Island Nuclear Plant Crisis will be released on Netflix next. Mass. “As a producer, I always think of them as the first stop to pitch original ideas. If their subscriber growth levels drop and that forces them to reduce programming, will they stop taking risks on new TV shows and Oscar films? “

Netflix acknowledged that fierce competition was partly the reason for the slowdown. The company said its primary competition is not with other streaming services but with diversions such as sleep and reading.

Now there’s a question as to whether Netflix’s core content is strong enough to set it apart, as even deep-pocketed companies like Apple and Amazon continue to increase their spending on critically acclaimed shows such as “Break” carried on Apple TV +. The next first season of the “Lord of the Rings” prequel, which is said to cost Amazon more than 50 450 million.

“The reality is that there is a lot of alternative stuff, where is the new stuff that is crushing it? Where’s the new franchise? “Asked Mr. Greenfield, the analyst.

Indeed, interest in Netflix’s vast library is showing signs of rising.

“For every single title on the Netflix catalog, the demand is fairly flat,” said Alejandro Rojas, vice president of applied analysis at Parrot Analytics, a research firm. “The catalog for HBO Max and Disney + is growing in double digits. That’s a big difference. ”

Netflix’s performance could cause rivals to rethink their own international expansion plans, potentially making more targeted efforts abroad. Netflix subscriptions have dropped, not only in the United States and Canada, but also in Europe and Latin America.

“Netflix has thrown a kitchen sink at this,” said Michael Nathanson, an industry analyst. “They were the first motivators, they spent a ton on stuff, and they’re creating more local stuff. They’ve done the right things, and yet they’ve hit the wall.”

Netflix executives, generally confident, appeared significantly volatile on Tuesday, when first-quarter results were released. Reed Hastings, co-chief executive, who once vowed never to have ads on Netflix, said the company would consider introducing low-cost, ad-supported tires in the next year or two. Netflix also said it would crack down on password sharing, a practice it has said in the past that it has no problem with.

Mr. Hastings said. “And now, we’re working hard on it.”

Netflix has no ad sales experience, while competitors like Disney, Warner Bros. Discovery and Paramount have huge advertising infrastructure. And the password crackdown has led some analysts to wonder if Netflix has reached market saturation in the United States.

Mr. Hastings tried to reassure everyone that Netflix had gone through difficult times before and that it would solve its problems. He said the company is now “super focused” on “returning to the goodwill of our investors”.

Brooks Barnes Contribution Report.

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