Despite an increase in subscribers, this quarterly value reveals Netflix’s strategy is not working as intended.
Netflix shares dropped over 8% on Thursday as the streaming giant revealed its quarterly earnings. Though new subscribers increased more than expected (5.9 million instead of 1.9), revenues tumbled below forecast.
Netflix revenues for the second quarter of the year amount to $8.2 billion instead of the $8.3 billion expected by markets. Further, revenues per subscriber fell 3% year-on-year.
The jump in new subscribers is due to Netflix lowering prices in some areas of the world. What really counts is the fall in revenues as it might prove their new business strategy is not working.
With a price of $168,02 per share reaching a new low in 2022, Netflix shares were down 72% from their highs in 2021. Increased competition and fleeing subscribers were bleeding the company dry, and a solution needed to be found.
In late 2022, Netflix (as well as other streaming companies) introduced an ad-based subscription model. Going against their long-standing no-ad policy, Netflix now offers a low-cost basic price level supported by advertisements.
One year later, this new system seems to be working slower than expected, with ad revenues barely making a difference. Chief Financial Officer Spencer Neumann said Netflix has got "a long way to go from where we are today" to reach just 10% of revenues from advertising.
Password sharing crackdown
The other major change Netflix applied to increase cash flow was cracking down on password-sharing accounts, removing another of the platform’s signature features.
Password sharing is the process of one paying user handing out his password to family and friends. That way, the same service is used by more people though only one is actively paying for it.
Netflix never considered this practice damaging to its business model, often acknowledging it with tweets like "Love is sharing the password".
In 2023, Netflix changed direction slowly implementing harsher rules in every country of operation. This resulted in many users deleting their accounts and switching to competition.
The fall in revenues per subscriber proves Netflix keeps losing crucial cash flow. In general, the streaming industry seems to have reached a plateau in terms of profitability.
Ten years ago, Netflix and streaming seemed like they would replace cinema theaters. As of today, it appears that their only potential is to replace cable television.
A strong market nevertheless, but streaming services need to stop pursuing a production company business model. Their focus instead should be to bring cable television, with its flaws and benefits, onto the internet.
