Netflix’s stock market crash this week has put the entire streaming sector on notice. There are reasons for this. The Californian company has lost tens of billions in capitalization after revealing that it lost 200,000 users in the last quarter. It is the first time in the last decade that it has not added new customers. And it expects another two million to drop out in the coming months. Investors’ panic also translated into falls in the shares of Disney (Disney+ offer) and Warner Bros Discovery (owner of HBO Max), two of its main competitors.
Are we facing a Netflix-only crisis or the beginning of an industry-wide turnaround? Most analysts point to the latter. Just look at the CNN+ streaming channel, which has just closed after just one month of life. There are a number of problems that affect all operators equally. The first of these, with the exception of growing competition, is the economic situation. Low-cost subscription business models suffer when the going gets tough. Those who have to tighten their belts will start there. The pandemic, the energy crisis, the war in Ukraine and inflation have been putting pressure on many pockets. Netflix will be the hardest hit because it has the most customers, but no one will be spared.
Consumers have also evolved. A report by Deloitte found last summer that young people, who are more price-sensitive as they suffer from economic hardship, are able to sign up for and cancel the same service several times in the same year. “Some mature users analyze their subscriptions month by month,” explains Rodrigo Miranda, CEO of ISDI (Instituto Superior para el Desarrollo de Internet). “This affects streaming platforms, but also music or sports services.”
Another ingredient must be added to this cocktail. The model on which Netflix has built its overwhelming growth seems to be reaching the end of the first phase, that of attracting users at rock-bottom prices. Now it is time to retain customers and make them profitable. To do this, it is necessary to combat password cheating (Netflix executives estimate that there are 100 million users who share their passwords with friends and family) and look for new ways of monetization, such as introducing advertising.
This last avenue has been explored in the industry for some time. Amazon and HBO Max already serve ads to those who want to pay less for their subscription. Disney+ has said it will do so. Netflix is not ruling it out either, despite having always made a banner of the absence of commercials on its platform. Morgan Stanley estimates that the company stands to make billions a year from it. The arrival of advertising seems inevitable. “In many ways, we’re seeing the television of the last half-century now being reincarnated in the streaming era,” JB Perrette, the Warner Bros Discovery executive in charge of online video channels HBO Max and Discovery+, said recently.
To write Netflix off as dead would be rash. It may have lost 200,000 users, but it still has 221 million left and its revenues have not stopped growing: it generates some $30 billion annually. It remains the undisputed market leader. Its founder, Reed Hastings, made the decision to transform his DVD rental company into a streaming platform at the turn of the century, when the Internet was far from functioning as it does today. Analysts called him crazy, as they did when he set out to become the world’s largest audiovisual production company. But it managed to convince investors and its growth was unstoppable. It is estimated that during the first pandemic year it was responsible for 11% of global internet traffic.
2016 was unforgettable for the company. That course gave its great international leap, entering 130 countries. There are studies that point out that it came to monopolize 40% of the nightly online traffic in the US. There were even those who proposed that operators should charge it for abusing the installed fiber capacity. Everyone wanted to imitate this successful model. It was also that year when Hastings uttered one of his most iconic phrases: when asked if he was worried about people sharing passwords, he said that “we love it when people share Netflix”. A few months earlier he said another: “Netflix will never run ads”. Both are in question today.
The phase of capturing at a loss has come to an end. The company had not considered ways to monetize its customer base until now simply because new additions did not make it necessary. The time had to come when that curve would start to flatten. “What’s happening with Netflix is not new. We’ve seen it already in other subscription models like insurers or mobile operators,” Miranda points out. “The expensive, really expensive and difficult thing is to get the user, and they’ve already done that.”
Now it’s time to retain customers. Either through prices, reducing them by placing advertising, or with special content. They could even offer new categories, such as video games, something that has been the subject of much speculation. “We have no plans to enter the video game sector,” Hastings himself told EL PAÍS Retina four years ago. Officially, he hasn’t changed his mind.
A data business
Netflix has even managed to sneak into the Olympus of big tech. Some U.S. media even reformulated the usual acronym to refer to them: from GAFA (Google, Amazon, Facebook and Apple) it became FAANG. This deference was not only intended to highlight its economic power (it reached a stock market valuation of over 300 billion dollars), but also to include it in the club of companies that master the art of extracting and exploiting huge amounts of user data.
One of the keys to the platform’s success, they say, lies in its good management of this treasure trove of information. Its content recommendation algorithm, based on viewers’ own ratings, has been extensively studied. Netflix also uses big data in its productions. The company’s analysts, for example, saw that the British series House of Cards was a hit, as were the films of actor Kevin Spacey and those of director David Fincher. “They identified that at the intersection of those three elements was a large potential audience,” data scientist Mark Tenenholtz said. To finish off the buzz, they served ads for their new series, an adaptation of the 1990 series, to those who came in contact with any of those three elements. The result was one of Netflix’s (and television’s) biggest hits to date.
The major streaming platforms (almost all but Apple TV) sell their customers’ data to third parties, as a Common Sense report showed last year. Their goal is to enrich and supplement the profiles they build of their users. “The moment I am giving data to a third party I can have a reciprocal equivalent. You gain information on uses, interests or situation that helps you hyper-personalize ads. Netflix customers would not put up with seeing conventional advertising, they need something super-targeted,” Miranda says.
Netflix has agreements, for example, with Meta. If someone posts on Instagram that they are sad, they might go to Netflix right after and see melancholic movies. It will be one of those cases in which we suspect that the machines are listening to us.