Netflix remains well ahead of most of its competitors outside the U.S., and is the largest streaming service in the world. The company believes it can execute its way out of the current predicament by luring new customers with better programs and finding more ways to charge its existing user base. The company still expects to add customers this year, and will have a stronger slate of new shows in the back half of the year.
The company is changing course after losing 200,000 customers in the first quarter, the first time it has shed subscribers since 2011. Netflix also projected it will shrink by another 2 million customers in the current second quarter, a huge setback for a company that regularly grew by 25 million subscribers or more a year.
Losing customers for the first time in a decade, Netflix Inc. is throwing out all of its old rules.
The streaming leader will introduce a cheaper, advertising-supported option for subscribers in the next couple years, and will start to crack down on people sharing their passwords even before that. Netflix also will curb its spending on films and TV shows in response to the customer losses.
The shares are already down more than 40% this year, tumbled as much as 27% to $256 in after-hours trading. Investors, analysts and Hollywood executives had been bracing for the company to report a sluggish start to the year, but Wall Street still expected Netflix to add 2.5 million customers in the first quarter.
Management pointed to four causes, including the prevalence of password sharing and growing competition. The company said there are more than 100 million households that use its service and don’t pay for it, on top of its 221.6 million subscribers. The Los Gatos, California-based company is experimenting with ways to sign up those viewers, such as asking people who are sharing someone else’s account to pay more.
After watching millions of customers abandon pay TV for streaming, U.S. entertainment giants merged and restructured to compete with Netflix. Investors encouraged this strategic shift, boosting shares of companies like Walt Disney Co.
Investors have begun to question whether some of these media companies will sign up enough customers to justify all the money they are spending on fresh programming. Disney fell as much as 5.2% in extended trading after Netflix reported its outlook, while Warner Bros. Discovery Inc., the owner of HBO Max, declined as much as 2.8%. Shares of Roku Inc., the maker of set-top boxes for streaming, dropped as much as 8.3%.
All of these competitors offer advertising-supported services, or are planning to do so in the near future. Netflix always said its viewers preferred its service over cable TV because there were no ads. Netflix also didn’t want to compete with Google and Facebook in selling ads online.
Netflix begins to resemble what it replaced. Cracking down on password sharing is a risk for a company that started by giving customers a cheaper, more convenient alternative to cable. By nudging customers to pay and inserting advertising.
