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SAN FRANCISCO (AP) — An unexpectedly sharp drop in subscribers has made Netflix consider changes to its service it has long resisted: minimizing password sharing and creating a low-cost, ad-supported subscription.
Announced late Tuesday, the upcoming changes are designed to help Netflix regain the momentum it lost last year. While big-pocket competitors such as Apple and Walt Disney began to distribute their audiences with their own streaming services, the pandemic-induced curfews that triggered excessive viewing were lifted.
Netflix’s customer base decreased by 200,000 subscribers in the January-March quarter; This is the first contraction since the streaming service launched in most parts of the world outside of China six years ago. The drop was partly due to Netflix’s decision to withdraw from Russia to protest the war against Ukraine, resulting in the loss of 700,000 subscribers. Netflix predicted a further 2 million subscriber loss in the current April-June quarter.
Erosion after a year of slower growth has rattled another key constituency for its shareholders, Netflix. After revealing its disappointing performance, Netflix shares tumbled more than 25% in long-term trading. If the stock dip extends into Wednesday’s regular trading session, Netflix shares will have lost more than half their value so far this year, wiping out nearly $150 billion in shareholders’ fortunes in less than four months.
Aptus Capital Advisors analyst David Wagner said it’s now clear that Netflix is grappling with an formidable challenge. “They’re not in any-(wo)man’s country,” Wagner wrote in a research note Tuesday.
The Los Gatos, California company estimates that nearly 100 million households worldwide watch the service for free using a friend or other family member’s account, including 30 million in the US and Canada. “These are more than 100 million households already choosing to watch Netflix,” Hastings said. “We need to get some degree of money for them.”
To encourage more people to pay for their own accounts, Netflix said it will expand its trial program in three Latin American countries (Chile, Costa Rica, and Peru). In these locations, subscribers can extend the service to another household at a discounted price. In Costa Rica, for example, Netflix plan prices range from $9 to $15 per month, but subscribers can openly share their service with another household for $3.
Netflix did not provide additional details on how a cheaper ad-supported tier of service would work or how much it would cost. Another competitor, Hulu, has long offered an ad-supported tier.
While Netflix clearly believes these changes will help it improve its current 221.6 million subscribers worldwide, these moves risk alienating customers to the point where they’re canceling the service.
Netflix had previously been hit by a customer backlash in 2011 when it announced plans to start charging for the then-nascent streaming service that was bundled free with the traditional DVD-mail service prior to its international expansion. In the months following this change, Netflix lost 800,000 subscribers, and Hastings issued an apology for failing the spinoff’s execution.
Tuesday’s announcement is a serious fallout for a booming company two years ago when millions of consumers gathered at home desperately sought entertainment – a void Netflix is happy to fill. Netflix added 36 million subscribers throughout 2020, the biggest annual growth since the video streaming service’s debut in 2007.
But Netflix CEO Reed Hastings now believes those big wins may have blinded management. “COVID has made a lot of noise about how to read the situation,” he said in a video conference Tuesday.
Netflix started heading in a new direction last year when its service added video games at no additional cost to give people another reason to subscribe.
Rising inflation over the past year has also squeezed household budgets, causing more consumers to rein in their spending on discretionary items. Despite this pressure, Netflix has recently increased its prices in the US, where it has the most household penetration and has the most difficulty finding more subscribers.
In the most recent quarter, Netflix lost 640,000 subscribers in the US and Canada, causing management to point out that most of its future growth will be in international markets. Netflix closed March with 74.6 million subscribers in the US and Canada.
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