It’s been a wild week for Netflix. Following a disastrous earnings call earlier this week, in which CEO Reed Hastings admitted to a 200K subscriber loss in the first quarter, and estimated as much as a 2 million subscriber loss coming up in quarter two. It’s their first loss of paid subscribers in over a decade, and while a chunk of that is a result of shutting down the service in Russia following their invasion of Ukraine, part of a larger effort to culturally isolate the country, they still would have lost subscribers even had they not had to pull out of Russia. As a result of the loss, Netflix stock is in free-fall, plummeting more than 35% on Wednesday alone, and as yet, it still hasn’t recovered, ticking down another 7.9% on Thursday. The outlook is so dire, investor Bill Ackman dumped his stock at a $400 million loss on Wednesday (oh no, he is a slightly lesser billionaire now).
So, is Netflix dead? Eh, probably not. There are a few things to keep in mind, the top two being:
The stock market is OBSESSED with annual growth whether such a thing is even possible for a company/industry or not, literally the whole market has at some point shifted from being about steady, reliable performance to wild upticks in growth that are unsustainable for pretty much everyone on a long enough curve, and…
NETFLIX IS NOT A TECH COMPANY.
For years and years, the investor class and business media has treated Netflix like a tech company, with their shiny algorithms and data-driven consumer products and their (toxic) work culture that falls into the “move fast and break things” tech diaspora. But Netflix, no matter how they dress it up and what corporate-techno jargon they use at Ted Talks, Netflix is, fundamentally, NOT a tech company. It is a movie studio. Up until basically Tuesday, everyone was happy to buy into the tech fantasy, until the inevitability of a saturated market and an underlying creativity problem caught up to Netflix. It’s not an unfamiliar story, WeWork was overvalued as a similar techie sheen dazzled investors until the day everyone realized that WeWork, despite its polish and corporate summer camp, is just a commercial real estate company. Once that realization hit, the company’s value cratered as the market started dealing with it for what it really is (in 2021, WeWork reported over $2 billion in revenue, and it was recently given a favorable stock rating).
Netflix is undergoing a similar reevaluation. The realization that it is, in fact, a movie studio is sinking in, as is the saturation of the market—there are only so many people who can subscribe to any given streaming service, especially as Netflix keeps raising prices and forcing some people to choose between them and other streaming services—and a dawning realization that Netflix doesn’t create hits. Certainly, they can do it on the television side, with shows like Squid Game, Bridgerton, The Crown, and Stranger Things being global, marquee hits. But on the movie side? That HALF of their business? Not a one. Netflix movies don’t crack the zeitgeist. This is a larger problem for streaming overall, as it seems increasingly obvious streaming favors TV shows more than it does feature films, but Netflix is running up against the reality that part of their problem is that despite huge spending and A-list names, they don’t produce blockbusters.
Certainly, Netflix can survive, can even rebound, reclaiming some of those lost subscribers, and get better at retaining the ones they do have. Cracking down on password sharing might boost the bottom line in the short term, but in the long term, they’re just going to have to do what every other movie studio does—produce hits. Well, that, and rein in spending. It’s not even the cost of Stranger Things that gets to me—the fourth season of a hit TV show is often more expensive—it’s the cost of films like Extraction, the Chris Hemsworth action movie, that kills me. $65 million! Entire! Dollars! And I know a lot of that goes to Hemsworth as the A-list star, since there is no backend on a Netflix movie, they have to pay more up front.
This is the business model Netflix created for themselves, and they seem really unwilling to invest more in theatrical releases and offload some of those costs onto backend bonuses like everyone else. So they’ll have to figure out balancing their inflated budgets against their stifled growth, and it will probably mean less productions. Less movies, as you can’t go around handing out $65 million to every Chris who walks in off the street forever, and eventually, less TV shows and/or even shorter seasons, because they’ll be looking to save money wherever they can. Netflix’s gravy train has come to an abrupt halt, and the question now is who are they when they have to start behaving like a real movie studio, and not a tech fairyland.
Live long and gossip,