After years of dominating the entertainment streaming space, Netflix (NASDAQ: NFLX) reported that its subscriber base shrank for the first time during the first three months of 2022, possibly signaling the beginning of the end for the current streaming model. As companies look for ways to continue to draw in watchers, many major streaming providers say they are considering running ads on their platforms.
In exchange for running ads, companies including HBO Max (NYSE: T), Amazon (NASDAQ: AMZN), Hulu (NYSE: DIS), and Paramount+ (NYSE: PGRE) each offer lower monthly subscription costs. Disney+ says it will add a similar option this year. Netflix, after years of swearing that an ad-supported subscription option wasn't needed, is beginning to back off its commitment to only offer ad-free streaming.
"Never say never," Spencer Neumann, Netflix's C.F.O., said regarding ads last month.
After a dismal earnings report, Netflix shares plummeted more than 35% on Wednesday, April 20, with the company losing a remarkable $54.3 billion in market capitalization. The company said it expects to lose 2 million subscribers this quarter, largely due to the conflict in Russia and competition from other services and activities, like reading or sleeping.
As the number of streaming platforms on the market increases, more Americans are canceling subscriptions that they don't use. Alongside the cap on the total number of services a consumer might be willing to pay for, analysts also point to an issue called "churning", unsubscribing and resubscribing to a service within one year. According to Deloitte consulting firm, one in every four Americans has canceled and resubscribed to a streaming service within a year.
"There's a ceiling on what the U.S. consumer can practically afford, just like what we saw back in the day with cable television," Kelly Metz of Omnicom Media Group said. Consumers "need advertising-supported models so that they can balance their bank accounts."
In the past, Netflix has had a permissive attitude towards password sharing, but it recently announced that it would also begin cracking down on password sharing amongst users.
"We've been thinking about that for a couple of years, but when we were growing fast it wasn't a high priority to work on," Netflix co-chief executive Reed Hastings said. "And now, we're working superhard on it."
Analysts have several concerns regarding the future of Netflix. First, unlike Disney, Warner Bros. Discovery (NASDAQ: DISCA), and Paramount, Netflix has very little experience with advertising.
Next, there's some question as to whether or not Netflix's catalog is strong enough to retain users. it's been some time since Netflix introduced a majorly successful show, like Stranger Things or Ozark both of which will soon be ending.
"For every single title on the Netflix catalog, the demand is pretty much flat," said Alejandro Rojas, the vice president of applied analytics at research firm Parrot Analytics. "The catalog for HBO Max and Disney+ is growing double digits. That's a big difference."
Finally, analysts are concerned that the company's decision to start cracking down on password sharing may be a sign that Netflix has reached market saturation in the U.S.