Hugh Linehan: We have reached peak Netflix. The world has changed

What’s gone wrong at Netflix? Media lit up this week with stories that the seemingly unstoppable streaming giant’s growth appears to have come to a grinding and unexpected halt, reporting on Tuesday that, for the first time in more than a decade, it had lost subscribers. The news sent shares plummeting 35 per cent on Wednesday morning, representing a €50 billion drop in the company’s value, which had already fallen significantly over the past 12 months.

Globally, a drop of 200,000 in a subscriber base of 222 million might not appear too serious. After all, Netflix can point to its withdrawal from Russia following the invasion of Ukraine, which it says cost it 700,000 subscribers. But 600,000 people cancelled their subs in the US and Canada after prices went up in January. And a further drop of two million projected over the next few months looks worrying.

Netflix says its recent price rises will yield more money for the firm, despite the cancellations. But there is a widespread belief that the rising cost of subscriptions to multiple streaming services is meeting consumer resistance at a time when the cost of living is rocketing. When you’re looking to reduce your monthly bills, the easiest place to start is to reach for your phone and opt out of some of your digital subs.

No further space

In some markets, Netflix’s problem may simply be that it has no further space to grow. In the US and Canada, half of all households already have a subscription, with a further 20 per cent piggybacking on a shared account. That’s 70 per cent of all homes, leaving little scope for further expansion.

Why does nobody have the decency to protest any more?

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What can Netflix do? Its first target will be the extraordinary number of households worldwide – 100 million – who are using shared passwords to access its content without paying for the privilege. Up until now the company has tended not to try too hard to stamp out these practices, presumably because it saw the freeloaders as potential future paying customers. It now looks set to call in those chips. "Those are over 100 million households already choosing to watch Netflix," chief executive Reed Hastings told shareholders this week. "We've just got to get paid at some stage for them."

Netflix is already experimenting in some Latin American countries with a low-cost add-on that allows people to share their account with two other households. But the question remains whether even a lower price threshold will be too high for many users.

Another solution may lie in the example set by platforms, such as Spotify, of a cheaper option with ads for those reluctant to pay the full price. Indeed, Hastings has confirmed Netflix is looking at launching an ad-supported service. “Those who have followed Netflix know that I’ve been against the complexity of advertising, and a big fan of the simplicity of subscription,” he said. “But, as much as I’m a fan of that, I’m a bigger fan of consumer choice.”

Market saturation and increased price sensitivity are markers of a business in transition from its early days as an innovative disrupter into a more sedate phase of consolidation.

Netflix, as the leader of the TV streaming revolution, enjoys first-mover advantage and a level of name recognition which remains the envy of its rivals. But those rivals are multiplying and the market grows more competitive by the day. The phenomenon of people switching from one service to another every month, based on which has the most appealing new titles, is likely to increase, and will in turn probably lead the services to try to lock in subscribers for longer time periods.

An extraordinary boom

None of this should impact immediately on what actually appears on our screens, but in the longer term old questions about the sustainability of the streaming services' business model are likely to resurface. For a decade now, there's been an extraordinary boom in film and TV production across the world, fuelled by demand for original content from Netflix, Amazon, Disney, Apple, Hulu, HBO Max and others. That has in turn seen increased employment everywhere, including here in Ireland, where studios in Wicklow, Limerick and Belfast have been kept busy despite the pandemic.

Some critics have argued for years that this is all a bubble, fuelled by tech industry venture capital and driven by a perceived need to grab as large a share of the new market as possible. This content boom, they argued, was bound to end in tears.

We shall see. But what events this week suggest is that a tipping point of sorts has been reached, and the years of breakneck expansion may be coming to an end. "What worked until this point may not be working anymore," media analyst Michael Nathanson told CNN Business this week. "The world's changed."