Can Netflix redefine success or is this the beginning of its end?

Streaming giant Netflix has seen a drop in user numbers for the first time in more than a decade. To stop the negative trend, Netflix is announcing changes in his business model that some users will not like.

4 min to read
Written by: Nataša Blagojević

Unlimited entertainment, available at any moment from smartphone or computer, an uninterrupted experience – average Internet users’ dream and three simple reasons why users around the world love Netflix. The period since the beginning of the pandemic has been particularly successful for the platform and despite optimistic forecasts about new 2.5 million subscribers, the beginning of 2022 was unexpectedly marked with the loss of 200.000 users in the first quarter. This is the first drop in number of subscribers since 2011. To make the scenario even worse, Netflix forecasts the loss of another two million subscribers during the second quarter of 2022. The news resonated among platform fans and investors, while the stock’s value sank in record time and shook the entire sector.

Photo: The value of NFLX stock between May 16th 2021 – May 16th 2022

Source: Nasdaq

What is the story behind the negative results?

The global streaming giant has been facing problems such as rising inflation and declining purchasing power for some time, while the competition is strengthening its activities. There have never been more sources of entertainment and the offer of various fun content formats has never been better. At the same time, Netflix as one of the longest-running streaming platforms already has high penetration in key markets. In the US, the service has recently become more expensive, which certainly did not delight users. The war in Ukraine and the withdrawal of service from the Russian market resulted in approximately 700 thousand users less.

Additionally, one of the problems Netflix has facing from the start is password sharing. They have decided to deal now with this topic more because they estimate that the existing 222 million subscribed households provides access to at least another 100 million other households, which seriously threatens the existing business model. A potential solution that Netflix is ​​testing in selected markets provides an option for users to add up to two users from another household to their account and pay a little more, or to switch other users to a new account, enabling those users to keep their browsing history and other elements of personalized services.

Ads are coming soon to Netflix

Along with this news, what resonated the most was the statement of Reed Harrison, Netflix’s CEO, who has always been a supporter of the simplest subscription model that does not include showing ads to users, and in which he hinted that this could now be changed on Netflix. He emphasized that the users of the service are the most important and if they prefer a lower subscription price, which includes watching ads, then they cannot ignore it. At Netflix, they are also guided by the satisfaction of users of other streaming services that have already implemented this model. Only time will tell whether this is really the case or Netflix signed its”death sentence” with this.

Video 1: Interview on Netflix business results in Q1 2022

What is certain is that Netflix is so popular because it offers quality content and personalization. Investing in high production and hits like Bridgerton, Inventing Anna, Tinder Swindler, Don’t Look Up or Red Notice is a direction the platform is likely to continue. Netflix is ​​not “the king of streaming service” without a reason and although so far there has been no word on how ads could work, precisely because we know what is the platforms strength and that the space for technical innovation is relatively narrow, optimistic prediction is that Netflix will find a successful formula to creatively implement paid content into its offer of movies and series in a way that will be equally entertaining and won’t be intrusive to users. Although there have been no ads on the platforms so far, the content abounds well-known brands and products.

Video 2: Collaboration of Netflix and the Eggo brand in the Stranger Things series

Led by several successful examples of product placement so far and huge customer base, globally popular brands as well as their creative teams likely wont miss a new opportunity and space to reach out to consumers. It remains to be seen how will this further affect the use of user data and whether this element, together with ads and interruptions in content consumption, will bother users more than they would be attracted by the potentially lower price of the service. Based on the information which was leaked to the public these days from Netflix employees, we will probably have the opportunity to find it out by the end of this year.

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