Netflix Has Peaked, What’s Next?
Since April, Netflix's valuation has almost halved. What led to this, and what are the lessons for business and product professionals?
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In April 2022, Netflix announced losing 200.000 subscribers during its quarterly earnings call, the first loss in 10 years. The news sent its stock and valuation plummeting, losing 35% the next day (equaling $50 billion), and even more since then. After these events, the company also announced organizational restructuring, laying off more than 150 employees in the process.
What happened to Netflix’s growth engine? Is the market getting too saturated and the competition too fierce? Do people use the service less often? And what lesson does it offer to others?
From DVDs to streaming
Before looking into the current situation, it’s useful to recap where Netflix is coming from and how it evolved over the decades.
Netflix started as a DVD mail rental company in 1997. The company successfully capitalized on technological innovation, as DVDs were just introduced in the same year in the US. This proved to be quite an advantage, as the VHS tapes were more costly to handle and more fragile.
Around 2000, the company changed to a flat-fee subscription model instead of a per-item renting fee, offering unlimited rentals without due dates or shipping fees. It reached its first profitable year in 2003 ($6.5 million), and one million shipped DVDs per day by 2005. Even back then, it had already started to focus on investing heavily in its recommendation algorithm.
Netflix’s streaming service launched in 2007 with 1.000 titles, which grew to 11.000 by 2011. That was the same year when the company spun off its DVD business from its main platform. The DVD rental business still generated $200 million in revenue last year, although the website currently shows a 404 page. Starting in 2013, Netflix started focusing on original content production, which made up 40% of all content in its US library in 2021.
In recent years, the streaming giant experimented with various content formats (i.e., shorts, interactive shows), and just last year, it announced plans to focus on gaming. At the time of writing, there were around 20 gaming apps made available by Netflix on Apple’s App Store.
Declining growth and the competition
While Netflix has the biggest audience among the various streaming providers (221.6 million paying subscribers in Q1 2022), it’s surely not alone on the market. Quite a few competitors have launched with similar business models not long after Netflix did, but they were not able to get ahead of the streaming giant. Amazon Prime Video is the only player that got close with its 180 million-plus subscribers.
The real threat to Netflix’s growth materialized when content owners started launching their own streaming services with the introduction of Disney+ and HBO Max. Both services launched around the same time (end of 2019, beginning of 2020) and represented a significantly different business model.
The difference? The two companies entering the space didn’t need to spend big money on licensing fees, as they already owned most of the content. Not only that, but they were also content partners to Netflix (and they still are), negotiating licensing conditions and costs.
Resulting in a situation where Netflix needed to partner up with its competitors.
While Netflix’s growth has flattened in the past quarters and expects to lose another two million customers in Q2 2022, Disney+ and HBO Max are growing solidly. Both services added 70-100 million new subscribers in the last 2 years, and they expect to grow further—although their growth rate will likely slow down.
Beyond the market saturation and users increasingly using multiple streaming providers, macro factors also contributed to Netflix’s valuation drop.
First, many tech companies are still overvalued. In Netflix’s case, the sobering news of subscriber loss might have triggered a value normalization, which could have contributed to the overall dip.
Second, global events such as Russia’s invasion of Ukraine also played a part. Netflix was present in both countries (the Ukrainian version launched in 2021), but the company suspended its services in Russia at the beginning of March 2022, locking out roughly 1 million subscribers.
Lastly, it’s good to keep in mind that Netflix has bumped its subscription prices up repeatedly throughout the years. In the US, the “standard” subscription was $11 in Oct 2017, and it costs $15.49 today—making it one of the most expensive streaming providers without a live TV offering.
Lessons for business & product management
Even with the latest news, Netflix has more than a healthy business: it’s available in 190+ countries, with 200M+ paying customers, and has close to $30 billion in yearly revenue. That’s no small feat.
With being said that, there are some important learnings from what the company has done and the opportunities it has missed:
A core experience that’s better than the competition: Over the years, Netflix has invested heavily in ensuring the core product experience is smooth and interested users can become paying customers in minutes. In addition, it’s fine-tuned its recommendation algorithm, introduced a discovery feed, and done a significant amount of A/B tests for further optimizations. The company didn’t forget about the importance of the core experience, and it did a lot to be better than the competition.
A hard-to-copy advantage is not impossible to copy: Netflix’s business model, content offering, brand, and technology were once considered to be a high fence to climb. New players were able to win sizable chucks of the streaming market by having a strong brand and content offering, and developing the rest. Netflix’s former product VP, Gibson Biddle, summarized the company’s hard-to-copy attributes a few months before Disney+ and HBO Max launched.
Underutilized benefits of scale: Unlike other big tech companies, Netflix didn’t experiment enough with new product lines that could have benefited from their already great presence. In contrast, Facebook launched a marketplace product at 1.5 billion monthly active users, and Apple introduced AirTags with 1.2 billion iPhone devices out in the wild. In both cases, the new products quickly won over the competition, and the companies’ already broad reach made a significant contribution to that.
So has Netflix really peaked? What’s the next big bet for the company?
In short, we’ll have to wait and see.
For one, online streaming is here to stay, so Netflix’s business is not likely to change radically in the next few years—but that alone does not make the stock quickly rebound. Beyond that, the company is pursuing gaming as the “new way to experience entertainment on mobile”, and it has recently launched an experiment with live TV.