The impact of the Russian-Ukrainian conflict on European and American Internet giants began to show, and Netflix became the first domino to fall.

On April 19, local time, Netflix released its first-quarter 2022 financial report. After the “avalanche” of the previous quarter, the situation is more severe this quarter.

According to the financial report, Netflix’s revenue in the first quarter was 7.87 billion US dollars, a year-on-year increase of 9.8%, which was lower than the expected value of 7.93 billion US dollars; net profit fell 6.4% to 1.6 billion US dollars. What’s more striking is that Netflix saw a net decrease of 200,000 paid subscribers in the first quarter, which is also the first negative growth of Netflix’s subscribers since 2011. Netflix expects subscriber churn to continue, with 2 million fewer paying subscribers worldwide in the second quarter of 2022.

Affected by the disastrous earnings performance, Netflix’s stock price plummeted by more than 25% in after-hours trading. According to the market value of $155 billion at the close of the previous trading day, Netflix fell by more than $38 billion in a few hours. The market has intensified concerns about companies with the same type of business, and streaming media stocks have also experienced violent fluctuations due to the influence of Netflix. Roku, Disney, and FuboTVz share prices fell in after-hours trading.

“I know this quarter was a bit disappointing for investors, that’s for sure,” Netflix co-CEO Reed Hastings admitted on a conference call. “Our user growth didn’t materialize. expected”.

Netflix co-CEO Reed Hastings

Netflix’s judgment on macroeconomic factors and competition situation three months ago was not accurate enough. According to Bloomberg’s review of Netflix’s past data analysis, if Netflix’s stock price continues to close lower on Wednesday in Eastern Time, it means that the company’s fifth consecutive quarterly earnings report will have a negative effect on the stock price.

The negative growth of subscribers is only due to the conflict between Russia and Ukraine?

In the first quarter of 2022, Netflix’s key financial indicators such as revenue, profit, and subscribers fell short of expectations. But there’s no question that user growth was a direct factor in the stock’s slump amid a string of poor numbers.

The Russia-Ukraine conflict was one of the immediate reasons for the loss of Netflix subscribers this season. Affected by the conflict between Russia and Ukraine, Netflix suspended its service in Russia and gradually ended all paid membership business in Russia. Netflix focused on explaining in its earnings report that this move resulted in a net loss of 700,000 Netflix paying users. Not long ago, in response to Netflix’s withdrawal, Russian users filed a collective lawsuit, demanding 60 million rubles in compensation from Netflix.

Excluding this factor, Netflix achieved a net increase of 500,000 global paid subscribers in the first quarter, Netflix said. But even excluding the impact of the Russian-Ukrainian conflict, Netflix’s performance in the first quarter of 2022 fell far short of market expectations. Before the earnings report was released, the market expected Netflix to add 2.5 million subscribers in the first quarter. Obviously, the problems encountered by Netflix are not just geopolitical.

In the earnings conference, Netflix also mentioned the reasons for the slowdown in growth, one of which is the fading of the “bonus” of the epidemic.

Affected by the epidemic in 2020, offline entertainment has been suspended, and online streaming media platforms have received dividends from the epidemic. Netflix’s annual net increase in paid members in 2020 increased by 31% year-on-year, which is also Netflix’s fastest growth cycle in five years.

The 2020 epidemic has accelerated Netflix to “harvest” potential paying users, but it has also allowed Netflix to gradually reach the user ceiling. Coupled with the relaxation of control over the epidemic in Europe and the United States, the driving effect of the “home” economy on streaming media has been greatly weakened.

In addition, under the global economic tension and severe inflation, consumers have to cut off unnecessary expenses in order to cope with the continuous soaring cost of living. The first is paid video subscriptions. Among them, Netflix has been affected most significantly in Europe and the United States, where inflation is the most severe.

According to CNN, data from media consultancy Kantar showed that UK consumers cancelled about 1.5 million video subscription accounts in the first three months of this year, with platforms including Netflix, Disney+ and AppleTV being hit Influence. On a household basis, 215,000 fewer UK households had purchased at least one paid subscription in the first quarter of this year. Meanwhile, about 38 percent of those surveyed said they plan to cancel subscriptions to paid video accounts within the next three months.

In the earnings conference, Netflix also stated that some markets, including Latin America, also lost a certain number of users due to the impact of macroeconomic conditions.

In addition to macro factors such as the Russian-Ukrainian conflict, the recession of the housing economy dividend, and global inflation mentioned by Netflix at the earnings conference, in the first quarter of this year, Netflix’s price increase in North America, its home base, was also one of the factors that led to the slowdown in Netflix’s user growth. one.

On January 14 this year, on the eve of the fourth quarter 2021 earnings release, Netflix announced that it would raise prices in North America. Subscription prices in the US and Canada will increase by $1-2 per month. The price increase brought a year-on-year increase in overall revenue in North America (from $3.17 million to $3.35 million), but it also resulted in a loss of 600,000 users.

In addition, the streaming red ocean is a long-term dilemma for Netflix. “Competitors also often put out really good shows and movies,” Reed said on the conference call, reiterating the growing competition in streaming. Netflix’s position as the leader in streaming is being challenged.

Data shows that in the fourth quarter of 2021, Netflix’s content market share was 46.6%, a significant decrease from 2020. While Netflix’s growth slowed, Apple TV and Amazon Prime Video began to seize Netflix’s market, and streaming media from established movie platforms such as Disney and HBO quickly joined the battle. In the first quarter of this year, the number of subscribers to Disney+, Disney’s streaming service, increased by 11.8 million, while Paramount, which will not officially launch the streaming service until June 2021, already has 56 million users.

Not enough growth, raise prices to make up

Regarding the concerns about revenue growth and profit growth caused by slowing user growth, Netflix proposed three solutions during the earnings call.

The first is to solve the problem of shared accounts. Netflix says there are more than 30 million households sharing accounts in the U.S. and Canada, and that number has grown to 100 million globally. And these “white prostitution” users cost Netflix as much as $9 billion a year.

Prior to this, a Netflix main account could be shared by multiple people (usually 5 people), and each person could add a watch list, viewing records, etc. to their sub-accounts. Earlier this year, Netflix began testing additional charges for sharing accounts in Chile, Costa Rica and Peru, which it said could expand to accounts that share passwords outside the home.

“If you have a sister who shares your Netflix account with you in another city to watch content on the platform, that’s fine, and we won’t shut down the service, but we may ask you to pay a little more so your family can Continue to use our service.”

Netflix said that it will make efforts to improve the commercial realization level of unpaid users, “This is a question we have been thinking about in the past year or two, but due to the rapid development of our business, it has not been the focus of our work in the past, but Now we need to work very hard to make that progress.”

Netflix did not disclose when this action will be launched globally, but it can be predicted from the external attitude of Netflix executives that the “hammer” will not be too far away.

Although executives are looking forward to the release of this part of the payment potential, there is no data to show the possible results of this move, and it is unknown whether users will pay extra for sharing accounts.

In addition to looking for the possibility of increasing revenue from unpaid users, another measure of Netflix is ​​to increase the unit price of customers.

According to Tianxia Finance, in early March, Netflix announced that it would increase the subscription price in the United Kingdom and Ireland. After the price increase, the basic subscription fee rose to 7 pounds per month, which is about 60 yuan. If users want to get high-quality 4K and HRD, the cost is 16 pounds per month, or about 133 yuan.

Netflix has also raised prices many times before, but Netflix has to guard against the problem of further loss of users caused by price increases.

In July 2011, Netflix split the original $10 DVD+ streaming media package service (about $5 each) into a single service fee of $8 (total $16), because there was no prior communication with users and price increases. Too high, by the end of September 2011, Netflix lost 800,000 users.

In 2016, Netflix raised the cost of $7.99 for old members to the same $9.99 as new members. Even though the previous system of $9.99 for new users has been implemented for two years, a large number of old users still canceled their subscriptions. Shares fell 16%. Learning from the previous lessons, Netflix’s subsequent price increases were more cautious.

Under the influence of factors such as rising costs and inflation, it is unrealistic to maintain subscription prices at the same level, but in today’s fierce competition in streaming media and the economic contraction, how to balance user experience and company revenue is even more difficult.

Judging from the results of the latest price increase, the loss of 600,000 users in North America in January this year has given a worrying signal. This time, Netflix has expanded the scope of price increases to the United Kingdom and Ireland. Under the environment of inflation and rising living costs, it is likely to experience negative user growth again in these regions.

Neither charging for shared accounts nor raising the unit price of a customer seems to be enough to fundamentally solve Netflix’s problems. So Netflix also came up with a new solution this quarter—ads.

Reed Hastings said Tuesday that Netflix is ​​now starting to consider a lower-priced subscription plan for users who are not sensitive to ads, in short, users may receive ads even if they pay to watch content.

For a long time, Netflix, which mainly pays for subscriptions, has not added advertisements or other promotions on the platform, which has also given Netflix a lot of praise among users.

“Those who follow Netflix know that I’ve always been against complex advertising in favor of simple subscription services.” But it’s time for Netflix to rethink its business model . “As much as I love this, I prefer consumption. Consumers who want lower prices and who aren’t sensitive to advertising get what they want.”

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