Netflix Inc (NASDAQ:NFLX) leadership (and investors) must be scratching their heads as to where they can go from here.
First-quarter subscriber numbers were much worse than analysts had predicted, where growth was expected to slow to 2.5mln new subscribers, but the company lost 200,000 instead.
To make matters worse, it expects even further losses in the second quarter, with 2mln more subscribers forecast to leave.
Elon Musk even took time out of his day to blame the streaming service’s slump in subscribers on a “woke mind virus”.
The Tesla billionaire, who’s currently staging a takeover bid for Twitter, said the company’s shows had become “unwatchable”.
Like many of Musk’s claims the evidence to support his assertions is sketchy and a more plausible reason might be that inflation has tightened the purse strings of households globally.
Add into that increased competition in the market and Netflix looks like it is heading into a perfect storm.
Self-help fixes to address the problems include the introduction of a cheaper service with adverts and a crackdown on account sharing.
According to Paul Allison, head of equity research at Freetrade, “it makes sense to offer an ad-supported model” while Netflix continues to raise prices.
Allison adds that competitors and old media companies in the US are already beginning to offer ad-supported services to try and reduce costs and retain customers.
Netflix also said it will be looking at ways to generate revenue from the 100mln households worldwide that watch the service through account sharing.
The argument is that these people are already enjoying the service, so should be happy to pay for it if they had to.
Reed Hastings, chief executive, said on an investors call that these customers “love the service,” but whether they love it for what it is or love it because it is free remains to be seen.
Trials on account sharing are currently being run in Chile, Costa Rica and Peru, and its second-quarter update later this year may give a clearer idea of how successful they have been.
“Netflix will first attempt to double down on subscriber growth through things like ad-supported offerings, content spending and increased functionality within the user interface"
Russ Mould, investment director at AJ Bell argues that one of the company’s biggest problems is that it’s too easy to leave the service.
“Consumers feeling the pinch of inflation will be looking hard at their outgoings and streaming services are an easy place to save money.”
For households with multiple services, it might be tempting to flick between the available options on a month-by-month basis as a means of saving money.
“The only way to stop it is to impose restrictions on when you can end a subscription or offer a discounted annual package to lock people in,” Mould added.
However, this again is something that will be difficult to sell according to Allison, who argues it goes against the Netflix ethos.
“A user-friendly simple subscriber model has been a major part of their model and I think they will be reluctant to change that for now.”
Annual discounts “could make sense”, but again in times of inflation how much more willing will consumers be to part with a large sum in one go as opposed to smaller, monthly payments?
“One strategy that Netflix could adopt is to restrict its best content to the top tier of subscribers. So, unless you pay the full price, there is a delay before you can see the latest releases,” said Mould.
Once again, this potentially creates more problems rather than resolving them.
Netflix has the advantage of spreading the costs of content across millions of subscribers.
Tiering membership based on which customers can view what content complicates that model alienates some of its audience and increases the piracy problem, according to Allison.
Of course, there are other options on the table that Netflix possibly hasn’t considered yet and its worsening situation might indeed require more than chasing users of mum and dad’s account to fix.
Buyouts and mergers are often used to gain quick market share and customers, although Allison believes that is “unlikely at this stage,".
Netflix shares though are expected to fall by 26% when the US market opens and as Musk and Twitter have shown if you drop the ball in media content there is always someone ready to pick it up.