The Netflix Predicament

How does a company go from having the most successful year of its existence, only to spiral this hard and fast, about two years later? Let's find out!

It's not too much of an exaggeration if I say the last couple of years has been an anomaly. This is a weird timeline to be living in. When the covid pandemic struck, scientists and leaders of the world were in consensus that till they studied this virus better, it would be best for everyone to remain indoors. For months the world came to a standstill as families kept themselves locked inside their homes.

Something very interesting happens when you're stuck inside the four walls of your house with the same people for weeks and weeks together. You tend to run out of things to talk about and games to play with each other. Thankfully, this is the era of constant internet connectivity, and gadgets that'll give you endless entertainment. As an aside, can you imagine a pandemic of this scale in the 1990s, minus your smart TV, mobiles and laptops and broadband connections?

I digress. When stuck indoors, the world turned to OTT platforms to satiate their boredom, take away their anxiety of the current situation, and just help them stay afloat. It wouldn't be a stretch to say that the coronavirus was a sort of a boon for OTT platforms around the world. For those confused, OTT is over-the-top media service or subscription video on demand.

In fact, a study shows that the then global subscription growth rate for OTT Video Streaming companies grew by seven times in March of 2020. This was as compared to the growth rate over the previous 12 months! A country like India, where internet penetration is growing at a breakneck speed, also saw a huge influx of users on OTT platforms that served up localized content as well as international ones.

One of the services that greatly benefited from the world being in lockdown was Netflix. A leading OTT platform that paved the way for others across the globe, Netflix has been a bit of a trendsetter. It was one of the few platforms that popularized international content, making shows like Money Heist, Squid Games and Dark popular to many in different countries.

Unfortunately for Netflix, they've been unable to capitalize on this growth. And when I say they've not capitalized on their growth, I'm being a bit generous. The company is facing one of its worst crises of all times, as we speak. Not only have their stocks dropped by 64.7% in the last six months in late 2021- early 2022, the platform has lost over 200,000 subscribers in Q1 of this year alone—its first loss of subscribers in over ten years!

So the question now is, what's ailing Netflix? And to study that, we must first know what's gone wrong for this leading OTT platform over the last couple of years.

Hi, I'm Nishtha and this is the Sketchnote Startup Podcast. Here's where we talk to you about the world of startups, productivity tools, personal developments, stories and a lot more.

Today, let's talk about the Netflix predicament. How does a company go from having the most successful year of its existence, only to spiral this hard and fast, about two years later? Why has this spiral sent shivers down the spine of the management, shareholders, and users alike? And is this is the beginning of the end of Netflix in the face of competition that offer better content and prices? Let's find out.

But first, let's rewind a bit. How did Netflix even come into existence? Unlike most OTT platforms, Netflix didn't start as one. An urban legend suggests that Mark Randolph and Reed Hastings founded Netflix when the latter apparently was fined $40 for returning a copy of Apollo 13 late to Blockbuster. And then was born a concept where you could rent and buy DVDs from a service called Netflix, online! That was in 1997, and in 1999 Netflix started a monthly subscription service. At this point, Netflix was kind of in contention with Blockbuster, and even offered to sell itself to the DVD rental giants for about $50 million. In what can be considered a move that turned out rather badly for them, Blockbuster turned Netflix down and launched their own subscription service.

In the next 9-odd years, Netflix became a success story that was quoted far and wide. In those years, they had, initiated an IPO, acquired 1 million subscribers, delivered its billionth DVD and finally, announced that they were moving away from DVD rentals to video on demand services. To say that this was a runaway hit idea would be an understatement. In the years since Netflix became an OTT platform, it has not just greenlit —and frankly changed the face of— original series, but has also made original movies that have been nominated for multiple awards, including the illustrious Oscars! Let's just say, when OTTs were revolutionizing the way we consume content, Netflix was at the forefront of it.

When Netflix started shop, the co-founders thought a monthly subscription model was the least likely route to go, and also the least likely to be successful. However, the ‘Nobody Knows Anything’ guiding philosophy has actually powered tonnes of experimentation in the Netflix labs. And many of them have been super successful.

There is Shonda Rimes's investigative drama, Inventing Anna, the budding romance between two queer high-schoolers in Heartstopper, Vir Das and Dave Chapelle exclusively making the haha-s in their specials, or a peek into the bygone era with Bridgerton. In 2019, a fairly unknown Australian comic Hannah Gadsby woke to worldwide acclaim on the release of her special— Nanette. Netflix, till very recently seemed to have the pulse of the audience just right.

Say what you will but Netflix has been at the forefront of globalizing TV and movie production in the last decade and has opened doors for many players along the way. Just like Bridgerton, a host of popular Netflix properties have even set the meme-verse ablaze and this has undoubtedly added to the popularity of Netflix. Schitt's Creek, The Crown and Love is Blind are among the most popular ones with GIF and meme loving junta. Not to forget, Netflix's content roster also contains timeless niche TV shows that are being discovered by audiences in the present era. And as with any endeavour, Netflix has had its share of misses too, but we'll touch upon that a bit later.

I guess I have pretty much set the stage to talk about the grimness of The Netflix Saga. In April 2022, Netflix shares fell by a staggering—hold your breath—49.2% The stock is down 72% from the six months prior to that. In May it fell 30%. Now, is this just Wall Street Wall Streeting? Or is this devaluation symptomatic of a deeper problem?

Before we move ahead and try to decode this drop, there's more to consider. The May stock plummet was the second such event for 2022. In January, the market price first saw a steep fall from $508 to $397.

But more importantly, the first-quarter results revealed that Netflix had actually bled subscribers for the first time in 10 years. 200,000 viewers lost in Q1! This, despite posting a 10% increase in revenue in the same time period, and an 8% increase in average streaming paid memberships.

In fact, with stock prices falling from $700 in October 2021, to $226 in April 2022, Wall Street has continued to remain bearish on Netflix. This also triggered the pullout of an eye-watering $1.1 billion investment by billionaire investor Bill Ackman, a deal in which he lost about $400 million on this stock. In a brief statement about his disinvestment, Ackman stated that he was unsure about accurately predicting the company's future prospect, thus causing his liquidation in Netflix stocks.

Yeah, when it comes to numbers, things look really, really bleak for Netflix. But numbers don't always give you the complete picture, do they? Let's attempt to understand what's REALLY going on here. But first, let's talk about what Netflix really means to the current generation.

Even as Netflix bleeds subscribers, Twitter users in India calling their content, ‘out-of-touch’, and behemoths like Disney+ dominating the landscape, Netflix remains a world leader in the streaming space. Netflix still commands a leading share of Total US TV time and US streaming market share, even though it's faltering in some other countries. All in all, Netflix has managed to rally us all up—and credit where it's due. In times of TikTok and Instagram, where pretty much everyone and their moms are content creators, attention spans to a bare minimum, and with a podcast on the side, many of us will still will be tuning into Netflix to wind down at the end of the day. And the company is already part of Internet folklore with "Netflix and chill" anyway. That isn't going away anytime soon.

According to a study in 2020, upwards of 40% of Netflix's content are foreign-language titles. That's quite a huge chunk of content! Title languages include Quechua, Nepali, Czech, Persian, Yiddish, Assamese, Wolof and even Sanskrit! Yep, we double-checked the last one. Punyakoti is an animated Sanskrit film based on a children's book and a Kanadda folk song. Fascinating, right?

Netflix has noted that there's merit in bringing up content from traditionally non-English speaking countries. “Much of our growth will come from outside the US," a spokesperson is quoted as saying. "Traditionally, US entertainment companies have viewed “international” as an export market for US content. But we saw long ago that great stories can be made anywhere and loved everywhere - dramatically broadening the pool of creators with whom we can work, increasing the variety of our programming and better serving local tastes. To support this, we’ve been building out capabilities like creative development, personalization, and language presentation/localization. Netflix is now producing films and TV in more than 50 countries with a high degree of integration in the local entertainment ecosystem resulting in the creation of blockbusters from every region.”

Explains the extreme popularity of Squid Games, the blockbuster Korean thriller-drama show, Money Heist, which was originally in Spanish and was dubbed in languages from across the world, Lupin, originally in French, and Dark, the runaway hit German show. A staggering 90% of Dark's viewership was outside of Germany. This also talks wonderfully about Netflix's dubbing efforts.

While these have been Netflix's core strengths and competitive advantage, will these help them weather the current streaming climate rife with strategic mergers, Disney+, and growth of regional OTT, and Disney+?  Wait, did I say ‘Disney+’ twice? Umm, yes I did. Lets talk about Disney+!

When it comes to Netflix competitors, Disney+ (Hotstar in India) has emerged as a strong one on many levels. The platform emerged in 2019 and has fast become a force to reckon with around the world. One of its first shows, The Mandalorian, made Disney+ an instant hit. Disney owns the Star Wars IP and is arguably one of the most successful Hollywood franchises ever. With Mandalorian based in the Star Wars universe, it was a no-brainer that it was going to be lapped up by fans everywhere.

The same goes for Disney properties from over the years. From Iron Man movies, Finding Nemo and content that appeals to kids and adults of all ages, sequels and reboots ruled the roost.

In India, Disney+ tied up with Hotstar to insane success. Here, it was live sports streaming that took the cake. Most international cricket matches, Premier League football, Formula 1, kabaddi, Indian Super League, and cash cow Indian Premier League all find a home on the platform. It wouldn't be too much to say that Disney+ Hotstar really married the idea of OTT and live sports here. Where Netflix was bleeding subscribers, Disney+ Hotstar added 2.6 million paid subscribers in Q1 of 2022.

Reports suggest that sports programming costs were pretty high for Disney+ Hotstar (the Premier League rights from 2022 to 2025 alone are rumoured to be a shocking $60 million. The IPL rights, 2022 onwards, were pegged at Rs 32,890 crore, double that of what Star network paid in the winning bid in 2017!) But the platform has offset it with lower cost mix of programming. A smart move, we admit.

Disney did have its own challenges though. Thanks to the virus, Disney's other revenue streams plummeted, which led the company to place its bets on Disney+. This strategy has worked for Disney and its stock prices have rebounded after a slump, that existed even before the pandemic. In fact, even in the backdrop of Netflix's horror show results, Disney's results were excellent, largely crediting their Disney+ home runs.

The bottom line is that Disney+'s product-first strategy has kept the entire behemoth stay afloat and almost return to its pre-pandemic stock price. It's a feat because their theme park business, a huge source of income for Disney, was heavily impacted by the pandemic.

While still talking about competition, let's not forget another super-global network: Amazon Prime Video. The global streaming space is the wild, wild west. And Amazon has solved this issue quite a bit by bundling its OTT subscription with its other Prime services like free and speedy delivery of products purchased from the Amazon website.

Jeff Bezos has made some strategic calls that have worked well for Amazon. One of them being the purchase of MGM Studios. This move has given subscribers access to classic movies like the Bond and Rocky series, Clash of the Titans, Gone with the Wind, and 17,000+ TV shows. Another strategic alliance forged by Bezos is paying $1 billion a year for a period of 11 years to exclusively stream NFL games in the US, outside of local broadcast networks. The $11 billion investment into hosting Thursday night football gives Amazon dominance over a single night of programming each week, 15 weeks a year, for 11 years. This programming is slated to start in 2022. Again, Strategy! Is the word ‘strategy’ a drinking game on this Pod? because it should be! The strategy seems to be doing so well, that Amazon is actively looking to stream live games of cricket and football too!

Compared to Netflix's 221.6 million, Amazon Prime Video sits gingerly with 117 million worldwide users. But that hasn't stopped them from trying to create more localized content. Like in India, for example. In April 2022, Amazon announced sequels to much-loved shows like Mirzapur, Family Man, Panchayat, Breathe and Made in Heaven. They also announced high-budget projects with Bollywood stars like Juhi Chawla, Shilpa Shetty Kundra and Shahid Kapoor.

Critically speaking, in India at least, the consensus is that Prime's content is far superior to Netflix's. The reason behind this is the choice of programs picked up. While Netflix's recent Hindi original, The Fame Game, made the right noise on the internet, it wasn't nearly enough. Netflix hosts content in various Indian languages, but it does have a while to go before it can catch up with the popularity that other platforms' Hindi hits command. The problem is that the quality of the content it picks up has always been contentious. It also gets a lot of flack for missing out on quality small-budget films, while wielding power to enable these productions.

Netflix has also had to face a peculiar problem—accusations from far-right conservatives. They note that Netflix is riding the “wokeism” cycle. It's kind of weird, but this is what it is for Netflix currently. Elon Musk, as one does, tweeted in April that “The woke mind virus is making Netflix unwatchable." The platform came under fire for airing a TV series called He's Expecting, based on an unexpected pregnancy of a trans man. The First Temptation of Christ, a Brazilian parody film that potrays Jesus as a gay man was also criticised. While Netflix has tried to push boundaries of storytelling, it hasn't necessarily sat well with all sections of world's societies. But hey, can't please 'em all, can you?

In India, came to a bit of a head in May 2022, barely a week before this episode is being recorded. When Netflix announced their adaptation of The Archies, set in India, viewers complained about how out of touch with reality these kinds of shows were. Twitter users compared it to shows on platforms like Prime and Sony Liv, which they could connect with, instead of a movie directed by a director known to showcase the lives of the rich and the famous, and starring kids of established actors. While the type of shows you like watching can be a matter of choice, the proof is in the pudding when you look at the numbers.

Prime Video has about 22.3 million subscribers in India, as of 2021, only behind Hotstar with a whopping 51 million subscribers. Netflix is a distant, distant third with 6.1 million subscribers only.

This brings us to a crucial and pretty straightforward point to why Netflix is doing badly in India. And how that is also a symptom of a bigger problem, globally. Pricing. Compared to other OTT platforms, Netflix snugly settles itself into one of the more higher-priced services. In India, Netflix's plans start at Rs 149 for mobile-only and 199 for regular pricing. Amazon Prime Video is 129 a month or 999 monthly. Hotstar, with its live games pretty much round the year—and Disney+ content to boot— is 299 a month or 1499 yearly, which seems like a steal to users here, clearly.

So, let's talk global money, shall we? Despite their falling user base, Netflix this year has hiked its prices in the US, the UK and Central Europe. The prices in Europe were bumped by at least a couple of Euros, and that's not cheap by any standards! Netflix has long maintained that it will continue gradually increasing its price commensurate to the value it provides. This will leave the ball rolling, with more TV shows and movies —and now even video games! Which is great for Netflix! But the thing to note here still is that Netflix has always tried to work with skimming pricing. For perspective, Netflix's most basic monthly plan in the US starts at $9.99. Hulu is at $6.99, Disney+ at $7.99. Apple—who even charges premium price on the cloth you use to clean your Macbook with—has priced Apple TV at half of Netflix's price, at $4.99.

Let's see the value proposition these services bring. Like we mentioned earlier, the Amazon Prime subscription comes with free delivery and exclusive deals on Amazon, Amazon Prime Music, Kindle deals, plus access to other smaller streaming services. Buying a bundled Apple pack will give you access to Apple Music, Arcade and TV, plus Cloud. In India, Disney+ Hotstar allows you to stream multiple Indian channels, as well as watch live sports—which in itself is worth the subscription price. To put it simply, in a world where other OTT platforms are providing something extra all the time, Netflix offers just, well, Netflix!

One way Netflix is trying to consolidate its monies is quite different from other players' ad-supported streaming strategies. Netflix estimates that 100 million users around the world use a shared account, with 30 million of those in the US and in Canada. The platform has already started cracking down on sharing passwords—which, let's face it, is part of popular culture and memes where exes keep using your Netflix password or random people ask you to share your account. Netflix has introduced two new paid sharing features where current members have the choice to pay for additional households, in three markets in Latin America.

MoffettNathanson, a research boutique, notes that removing sharing abilities may be a huge moneymaker in the eyes of Netflix, but actually it's just further evidence that the product has hit maturity in key markets. A huge reason why people buy premium plans that allow up to 4 screens is to be able to share their Netflix accounts with their family and friends. But when that's subjected to terms and conditions like geographical restrictions, it's bound to piss off more people than they probably expect!

For those who've been studying Netflix's patterns over the last few years, these issues combined to create one big headache for the platform won't come as much of a surprise. The truth is that Netflix has had long-standing concerns about growth. A study conducted by research firm Antenna revealed that long-standing users, that is those who had an account for over three years, are fast cancelling their subscriptions. The number was at 5% in 2020, and has risen to a crazy 13% in Q1 of 2022.

In the wake of its long-standing subscribers now cancelling their accounts, many have wondered if this is some sort of a Streisand effect. “People weren't thinking about their Netflix subscriptions, because it's always been there,” said a Reddit user, “Now Netflix has made people question, ‘Do I need this?’ And increasingly the users are answering, ‘No’."

But Netflix wants people associated with it to know that it has a formidable plan to recoup. In a letter to its shareholders, they admitted to this concern and said that the staggered growth was initially clouded by the pandemic. But since normalcy has sort of resumed, the jig is up and Netflix does have some pivots to make. And they've already begun working on things.

In a gloomy outlook towards the impending, looming recession, Netflix has laid off some of its staff as of May 2022. The company fired about 150 employees in mid-May. Some more changes they're trying to make are in terms of improving the quality of programming. The platform is also working to improve recommendations on its page, to keep users on Netflix.

Whether or not you believe Netflix's rigidity with content and price skimming has been the reason for its gloomy 2022, the truth is that the macro of the streaming business is currently re-adjusting. While Netflix was one of the first VOD platforms to have globally exploded, Amazon Prime, Disney, Hulu have all been experiencing a boom of their own. Especially with some smart, strategic regional content across the world, as well as acquisitions of legacy franchises and classic movies and shows. A new titan in the streaming space is silently emerging following the merger of Warnermedia and Discover+ too. This is set to pose a major challenge and disrupt current players in this space.

We also can't discount the sluggishness of global economic growth, increasing inflation, impending recession and geopolitical events such as Russia's invasion of Ukraine, as well as COVID fallout affecting streaming giants like Netflix. It's a gross oversimplification but hey, we do have limited time available on this podcast right?

But adapting to the current climate is the name of the game. Whether it's Disney+ leveraging its VOD segment over other ailing ones, or Amazon acquiring MGM Studios, or the subject of our show today, Netflix slashing its prices in India. the economics of the streaming space is up in the air for everyone! And strategizing is the name of the game (That's right. The game's on. Drink up!)

Join us again next time for another fascinating tale from the world of startups and corporates. Also stay tuned for more interviews, byte-sized productivity hacks and much, much more. If you don't already, subscribe to our podcast, available now on all leading podcast platforms. Oh and don't forget to share this episode if you liked it. Tag us on Twitter, we're @SketchnoteCo.

Until next time, I'm Nishtha and this has been The Sketchnote Startup Podcast.

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