The Netflix stock market crash this week put the entire streaming industry on notice. The California-based company lost tens of billions in capital after revealing that it lost 200,000 users in the last quarter. It’s the first time in the past decade that he hasn’t won any customers, and he expects another two million to leave in the coming months. Investor panic has also caused the shares of two of Netflix’s main competitors to tumble: Disney, which runs the Disney+ platform, and Warner Bros. Discovery, which owns HBO Max.
Is the crisis exclusively for Netflix or does it herald an industry-wide change? Most analysts point to the latter. The CNN+ streaming channel, for example, just shut down after just a month. All services face the same set of problems. The main problem is the current economic downturn. The pandemic, energy crisis, war in Ukraine, and inflation are straining the finances of many consumers, and when users have to tighten their belts, subscription services are the first to go. Netflix will face the biggest hemorrhage of customers simply because it has the biggest subscriber base, but no one will be spared.
Consumers have also evolved. A Deloitte report found last summer that young people, who experience greater economic insecurity and are therefore more sensitive to price variations, often subscribe to and cancel the same service several times in the same year. “Some mature users analyze their subscriptions month by month,” explains Rodrigo Miranda, director general of ISDI (Higher Institute for Internet Development). “This affects streaming platforms but also music and sports services.”
Netflix is also facing profitability issues. Its recent growth model – enticing users with incredibly low prices – appears to be nearing the end of its viability. From now on, he must retain his customers and make them profitable. To do this, Netflix must crack down on password sharing: company executives estimate that 100 million users share their passwords with friends and family. The platform must also create new ways to monetize its service, such as introducing advertising.
Other services have been exploring the latest route for some time now. Amazon and HBO Max are already showing ads to those who want to pay less for their subscription. Disney+ said it would do the same. Netflix hasn’t ruled out the option, although it has always pointed to the lack of ads on its platform. Morgan Stanley estimates that the company should earn billions a year from the sale of advertisements. The arrival of advertising seems inevitable. “In many ways, we’re seeing the television of the past half-century reincarnated in the age of streaming,” Warner Bros. CEO JB Perrette recently said. Discovery supports video channels.
It would be unwise to leave Netflix for dead. It may have lost 200,000 users, but it still has 221 million left, and its revenue has continued to grow: it generates around $30 billion a year. It remains the undisputed market leader. Its founder, Reed Hastings, made the decision to turn his DVD rental business into a streaming platform at the turn of the century, long before the internet worked the way it does today. Analysts called it crazy, as they did when it decided to become the biggest audiovisual production company in the world. But Hastings was able to convince investors and its growth was unstoppable. It is estimated that in the first year of the pandemic, Netflix was responsible for 11% of global internet traffic.
2016 was a landmark year for the company. That year, it expanded internationally, entering 130 countries. Studies indicate that he was then responsible for 40% of nightly online traffic in the United States. Some have even proposed that ISPs charge the company for abusing installed fiber capacity. Everyone wanted to emulate the successful model. That year, Hastings uttered one of his most iconic phrases: when asked if he was worried about people sharing passwords, he replied that “we love people who share Netflix.” . A few months earlier, another said, “Netflix will never have ads.” Both statements are now in question.
The audience capture phase is now complete. Until now, the company hadn’t thought about ways to monetize its customer base, simply because the steady growth of its customer base didn’t demand it. This curve was to eventually flatten. “What’s happening with Netflix is not new. We’ve seen it before in other subscription models, like insurers or mobile operators,” says Miranda. “Which is expensive, really expensive and difficult , is to get the user, and they’ve already done that.”
Now is the time to build customer loyalty, either by lowering prices through advertising or with special content. They could even offer new services, like video games, an idea that has sparked a lot of speculation. “We have no intention of getting into the video game business,” Hastings himself told EL PAÍS Retina four years ago. He hasn’t officially changed his mind.
Netflix has made its way into the pantheon of big tech companies. Some American media have even reformulated the acronym to designate the Internet giants: from GAFA (Google, Amazon, Facebook and Apple), it has become FAANG. The company’s inclusion is intended not only to highlight its economic might (it exceeded $300 billion in market value), but to include among companies that have perfected the art of mining and mining huge amounts of user data.
One of the keys to the platform’s success is how it handles this information. Its content recommendation algorithm, based on viewers’ own ratings, has been widely studied. Netflix also uses big data in its productions. Company analysts, for example, noted that the British series House of Cards was a success, as were the films of actor Kevin Spacey and director David Fincher. “They identified that at the intersection of these three elements was a huge potential audience,” said data scientist Mark Tenenholtz. To generate buzz, they showed ads for their adaptation of the 1990 series to viewers who interacted with any of these three elements. The result was one of Netflix’s (and TV’s) biggest hits to date.
Almost all major streaming platforms, with the exception of Apple TV, sell their customers’ data to third parties, as a Common Sense report showed last year. Their goal is to enrich and complete the user profiles they create. “When I transfer data to a third party, I may have a reciprocal equivalent. You get insights into usage, interests, or situations that help you hyper-personalize ads. Netflix customers could not watch conventional advertising. They need something super targeted,” says Miranda.
Netflix has agreements, for example, with Meta. If someone posts on Instagram that they’re feeling sad, they can open Netflix to see moody movie recommendations. These are the times when we suspect the machines are listening to us.