Photo-Illustration: Vulture; Photo by Steve Dietl/Netflix
Twenty minutes after Netflix announced the shocking news Tuesday that for the first time in a decade, it actually lost subscribers during a fiscal quarter, an executive at a rival streamer texted me a very simple reaction: “ ,” he wrote. Schadenfreude via emoji may sting, but it’s the least of Netflix’s problems right now: Its stock price collapsed by more than 35 percent Wednesday, erasing more than $50 billion in value in a single day. (It has since dropped another 4 percent today.) The news was so grim, even longtime Netflix bulls had no choice but to concede the tech company that ate Hollywood now finds itself grappling with the reality that its decade of unchecked growth has come crashing to a halt. As streaming evangelist Rich Greenfield of Lightshed put it in a report for clients, “Netflix felt vulnerable yesterday in a way that it never has before.”
This is clearly the biggest crisis for Netflix since company founder Reed Hastings tried to spin off streaming into the ill-fated Qwikster back in 2011, and there is simply no way to spin it otherwise. Yes, there are some mitigating factors that explain how things got so bad so fast — everything from the way COVID clouded the true state of the streamer’s business over the last two years to the effects of more recent external factors, such as inflation and the Russian invasion of Ukraine. I wrote about some of these on Tuesday, but none of them explain away the real problem for the streamer. In a nutshell, Netflix hit a wall in terms of growing its subscriber base far sooner than it — or Wall Street — ever expected.
This matters because the company has always justified its massive spending — on content, on engineering, on highly paid executives — by arguing it was a surefire way to keep making dramatic gains in subscribers. It was a “virtuous cycle,” as Netflix liked to call it, and while there have been hiccups over the years, by and large the cycle kept spinning forward. Even after the very disappointing earnings report in January, Netflix suits kept calm and carried on spreading the growth gospel. Last month, for example, chief financial officer Spencer Neumann told a Morgan Stanley conference he still believed Netflix was on a fast track to “a business that’s a half a billion members,” or more than double the roughly 222 million it currently has.
But something changed this week. While Netflix is by no means declaring long-term growth out of the picture, it has suddenly turned very pessimistic. It is now forecasting it will lose another 2 million subscribers over the next three months, the sort of big decline we’ve grown used to seeing reported by legacy cable providers — not a tech disruptor such as Netflix. All of a sudden, industry folks I’ve talked to are asking whether Netflix will even be able to get to 300 million subscribers anytime soon, let alone 500 million. “Two hundred million was a fairly easy climb,” one industry vet who works at a streamer told me Wednesday. “Netflix did it first and arguably better than anyone else. But it’s hard to get to 300 million when you’re as mature as Netflix is in terms of people using it and knowing about it. The growth curve is just so much harder for them than anyone else right now.”
When the inevitable limited series about the history of Netflix gets made, this week may well end up the metaphorical moment where the director inserts a needle scratch, the action freezes, and an actor playing Reed Hastings turns to the camera and says, “So you’re probably wondering how I got here?” It’ll probably be a lot easier to answer this question with the benefit of another five or ten years of hindsight, but right now, here are a few theories on how Netflix got to this inflection point — basically, why growth has stalled.
Hits have always driven the success or failure of entertainment companies, and to some analysts — and Netflix execs themselves — not having enough must-stream content lately is the chief cause of the Great Growth Slowdown. “What solves for growth is high quality TV,” streaming analyst and author Matthew Ball (The Metaverse: And How It Will Revolutionize Everything) told CNBC yesterday. Ball believes Netflix chief content officer (and now co-CEO) Ted Sarandos identified this glitch in the company’s binge factory a while back. “Netflix seems to have realized the need to reset TV way back in [fall] 2020,” he told me. “The most covered change was Cindy Holland, a nearly two decade report to Ted Sarandos, being replaced by Bela Bajaria. But there were also reports that Netflix was shifting to a more traditional — i.e. Hollywood — development hierarchy while also reining in who had green-light authority in the room.”
As Ball sees it, that exec shake-up coupled with Hastings hinting about slower spending growth and the elevation of Sarandos to co-CEO can now be read as signs the two men “knew TV had to improve its batting average and efficiency.” And while in the old days of linear TV, you could fire your programming chief, bring in a new one, and have a whole new slate on the air within the space of a single year, streaming operates a lot more like the movie business: Change comes relatively glacially thanks to far more ambitious (and expensive) productions and the full-season release model. “This sort of reset takes three to four years to take full effect, even when done right,” Ball says. “Your next year is in the can, the year after is still mostly tied to what was in development before the change, and in the third year, most of your shows are still returning ones.”
Of course, Sarandos has never been public about a need to “reset” the creative at the company. On Tuesday’s earnings call, he made the case Netflix actually is still making plenty of programming audiences want, citing strong viewership of Bridgerton, The Adam Project, Ozark, and Inventing Anna as proof. And yet if you read between the lines, it’s clear Sarandos thinks the issue is that the number of home runs Netflix is hitting simply isn’t enough, not given the massive number of at-bats the company takes every year. “We have to have an Adam Project and a Bridgerton every month and to make sure that that’s the expectation of the service constantly,” he said.
Problem is — and again, this is not some massively deep observation — wanting more hits and actually making them are two very different things. Netflix until now seems to have believed the best way to produce them is to throw all the money it can find at Hollywood and wait for the successes to start rolling in. It’s why five or so years ago, anybody with a hint of success in TV (or movies) started getting a call from their rep saying, basically, “Netflix would like to write you a big check.” The streamer’s massive deals with the likes of Shonda Rhimes and Ryan Murphy ushered in years of production cost inflation in Tinseltown, with Netflix bidding up the price of talent at every level. The new streamers who entered the market after had no choice but to spend big too. But as Ball presciently pointed out in his 2020 analysis, “If all it took was spending more on top talent, the video business would just be about who spends more.” Netflix’s growth results over the past six months prove that’s not the case.
Netflix execs over the years have been fond of saying their biggest competition isn’t with other entertainment companies but with other activities — sleep, Fortnight, TikTok. The inference was that while, yes, Netflix is powered by great programming, it had become so beloved by subscribers, the platform itself was more important than any individual title. One industry vet who’s worked in both streaming and linear says Netflix tried to create a world where “entertainment is something you do” — open the Netflix app — “as opposed to shows and movies you love and share with friends.” That strategy may have worked when Netflix and streaming were novel, but it is proving to be far less successful in a universe where two other companies (Warner Bros. Discovery and Disney) have streaming offerings nearly as robust as Netflix and a handful of others (Amazon, Apple, Comcast, Paramount Global, AMC Networks) are in the market with well-stocked (and, in some cases, better curated) platforms of their own.
Sarandos insists Netflix’s internal data suggests it is still engaging audiences as well as ever and that overall time spent watching content hasn’t taken a hit. But time spent viewing doesn’t measure passion — how much audiences love what they’re watching and feel it is essential. Social-media buzz and critical reviews are hardly foolproof ways of determining how beloved content is, but they’re not nothing, and even a casual observer of the TV marketplace can immediately grasp that HBO Max, Apple, and Disney’s Hulu have been doing a better job lately launching new shows that dominate the cultural conversation, while Netflix is doing so far less often. Yes, Squid Game was arguably the defining TV hit of 2021, and Netflix’s global platform remains an awesome thing. But when I spent a week at Netflix four years ago, Sarandos took great pride in handing me a printout from IMDb showing how basically half of the 30 top-ranked shows on the site streamed on Netflix in the U.S. He said this mattered more than ratings in some ways because it was a demonstration of just how intense the fandom was surrounding the company’s programs. When I checked out that same list this week, I counted just eight series with a Netflix connection — still more than any other streamer but not nearly as dominant as in 2017.
But it’s not just that viewers have more legit streaming choices. The mere existence of these well-funded rivals hurts Netflix’s ability to buy the best content in the market. Five years ago, top content creators who wanted immediate global impact and a huge paycheck really only had two choices — Netflix or Amazon Prime Video. There was no HBO Max or FX on Hulu in the picture to offer the reach of Netflix, nor did execs at those networks have the content budgets they have today. But now they — along with other new streamers, particularly Apple TV+ — are increasingly beating out Netflix for the best ideas.
Netflix got where it is by being a classic disruptor: It totally upended the way we watched TV and pioneered the idea of a global TV network. Releasing a half-dozen new shows every week and putting out all episodes at once for audiences to binge were innovations that helped make Netflix what it is, and there’s no doubt that early on, such differentiations from traditional TV were a plus. Ditto not having advertising (though HBO got there four decades earlier). But what helped fuel Netflix’s explosive growth early on may now be hurting it at the margins — not because those ideas are suddenly bad but because company execs have been almost dogmatically resistant to change.
Take the binge model, for example. It is core to the company’s DNA, and many, many viewers do prefer not to wait between episodes. But millions of viewers also love the idea of appointment TV, and what’s more, as Netflix struggles to make more hits, a weekly release model extends the shelf life of a show and helps build word of mouth. While Netflix has taken small steps to evolve its release model, particularly with unscripted shows, it refuses to experiment with weekly releases on its original scripted shows. One exec at rival streamer I talked with yesterday believes this is a huge mistake, if only because it makes it harder for Netflix to build those reliable franchises it so desperately needs more of. “Everyone loves bingeing, but the downside is because you and I don’t experience shows at the same time, I don’t get to bond with friends over, say, episode four of Squid Game in the way you do with a weekly show,” he said. “You maybe talk about the show once for 15 minutes, but that’s it.”
Netflix is further eroding its connection to audiences through its unwritten mandate to end the vast majority of its new shows after no more than three seasons, with only the very biggest (or most cost-efficient) scripted hits lasting longer. Execs seem to have decided that churning out more new shows in a bid to find massive hits is a better use of money than producing more seasons of shows people love but perhaps aren’t as globally popular as the streamer wants. “They’re commoditizing entertainment when they end shows so soon,” the competing exec told me. “They’re making it disposable. They’re telling people it doesn’t matter.”
The common thread here is that Netflix execs have become so convinced of the superiority of their platform, they have become resistant to evolving it, even as the competitive landscape has dramatically changed. A company that was once ahead of the curve now finds itself playing catch-up as a result.
As rough as the last two days have been for Netflix, things are probably going to get worse in the near term, at least in terms of what happens inside the company. While Netflix’s revenue situation is actually doing pretty darn well — it lost subscribers but brought in more money thanks to the price hikes — there has already been at least one report that staffers at the company have been asked to examine their budgets for savings. On Wednesday I spoke to two industry sources who also told me they expected Netflix to begin looking for cost savings, and quickly, with one source suggesting Netflix managers will likely be asked to start justifying internal head counts. “They’re definitely looking at cutting everything,” this person said. Given how much of the company’s valuation has vanished in the wake of the stock collapse, such budget savings could become even more imperative.
Still, I don’t think it would make much sense for Netflix to appear as if it’s panicking. The big issue for the company right now isn’t revenue but growth: It needs to find ways to get more people to sign up and fewer people to cancel each month (though it already has a lower churn rate than most of its rivals). This week saw Hastings announce one big plan to accomplish this: a lower-priced tier of Netflix that includes ads. It was a massive reversal of years of execs, led by Hastings, insisting commercials had no place on the service.
Unfortunately, the way it was announced — blurted out by the co-CEO rather than through a carefully scripted press release — made the move seem “a desperate attempt to deflect from the subscriber numbers,” as one industry insider told me. But optics aside, it was actually an encouraging sign that perhaps Netflix execs have been humbled enough by the last few months to now be open to bucking internal orthodoxy and exploring some necessary changes.
The big unknown is whether Netflix will move not just to slow the increase in its content spending — which it already has hinted is on the agenda — but actually reduce overall spend, perhaps even substantially. While nothing should be ruled out after this week, I think it is more likely that Netflix will instead change how it spends its content budget and what kinds of shows it makes. How exactly that plays out is the big unknown, along with so many other things at Netflix right now. I don’t buy into any of the darkest gloom-and-doom scenarios some Netflix skeptics continue to spread. Wall Street may have broken up with the company, but it remains the world’s biggest TV platform by far.
Still, there really hasn’t ever been a more uncertain period for Netflix than the one we’re experiencing right now, and it promises to test the abilities of Hastings and Sarandos like never before. As one exec told me, “They knew how to manage a company on a trajectory of growth. They’ve never had to manage a company at this pace.”