Netflix breaks its rules after subscriber losses erase gains
Netflix Inc. is throwing out all of its old rules after losing customers for the first time in a decade, saying it will introduce an advertising-supported option and crack down on people sharing passwords.
Shares of the streaming leader plunged as much as 39 per cent, erasing years of gains in the biggest intraday drop since 2004. The swoon made Netflix the worst-performing stock of the year on both the benchmark S&P 500 and Nasdaq 100 indexes and sent shock waves across the media universe, sinking Warner Bros. Discovery Inc., Roku Inc. and others.
Netflix is seeking ways to stop a loss of subscribers and combat investor fears that its best days are over. Co-founder Reed Hastings had said for years that he doesn't want to offer advertising and had no problems with password sharing.
But 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 two million customers in the current quarter, a huge setback for a company that regularly grew by 25 million subscribers or more a year. Netflix also will curb its spending on films and TV shows in response to the customer losses.
“It's just shocking,” said analyst Michael Nathanson of MoffettNathanson LLC. “Everything they've tried to convince me of over the last five years was given up in one quarter. It's such an about face.”
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. The shares were already down more than 40 per cent this year.
Hastings and co-chief executive officer Ted Sarandos had previously dismissed the company's slowing subscriber sign-ups as a speed bump related to the pandemic, which had accelerated Netflix's growth in 2020. But the company 's growth hasn't returned to pre-pandemic levels.
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, Calif.-based company is experimenting with ways to sign up those viewers, such as asking people who are sharing someone else's account to pay.
Netflix's troubles are a warning sign for its peers and competitors. 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. that demonstrated a commitment to streaming.