Peak TV: The Aftermath

Shares of Netflix plunged 35% on Wednesday (4/20), knocking $54 billion off its market cap one day after it stunned Wall Street by announcing a net loss of 200,000 subscribers in the first quarter instead of its forecast gain of 2.5 million subs for the period.

For good measure, the company projected an additional loss of 2 million subscribers in Q2.

In their earnings call, Netflix executives blamed the loss, in part, on increasingly formidable competition from the likes of Disney+, Apple TV+, Amazon Prime, HBO Max, Paramount+ and the host of other streaming services now encroaching on its turf, to say nothing of the growth of home-grown competition in international territories. But there is really no excuse for surprising the Street with that big a miss.

Blame for the surprise doesn’t all fall on Netflix, however, nor will it be alone in experiencing the fallout. Disney+, for instance also missed its forecast for Q1, reporting 103.6 million subscribers worldwide, well below the 109 million analysts had been expecting, knocking 4% off its share price. Red flags have been waving over the entire video streaming business for a while, in fact, if anyone cared to look.

Earlier this month, Nielsen’s inaugural State of Play report on streaming noted that nearly half of streaming viewers (46%) feel overwhelmed by the number of program choices they are presented with today, and with the number of different services and platforms they must subscribe to in order to watch their favorites. The report showed that consumers had more than 817,000 unique program titles to choose from as of February 2022, compared with 646,000 in December 2019 — a nearly 20% increase.

A separate study by Interpret found that 20% of consumers feel they subscribe to “too many video streaming services.” Consumers subscribe to an average of 4-5 subscription VOD services, according to Interpret, and the majority also access multiple ad-supported streaming channels.

Prior to the Netflix announcement, Kantar Media reported that U.S. household penetration rates for video streaming services have been falling across the board for several months, including at Netflix, where household penetration fell 0.3% in Q1 after slipping 0.5% in the previous quarter.

Netflix is actually holding up somewhat better than its rivals, in fact, in terms of household penetration. Amazon Prime’s penetration rate fell 3.2% in the first quarter, while Apple TV+ was off 15.6%. Discover+ SVOD suffered a 3.8% decline, while Paramount+ AVOD was down 0.6%.

Churn is one big factor behind fluctuating penetration rates and subscriber counts. With so much content and so many services, consumers are adopting a strategy of serial subscriptions, signing up for one service to watch a particular program or programs, then dropping it to move on to another.

The bigger, longer-term problem, for both Netflix and the rest, is diminishing returns. With so much content available to consumers, on so many different platforms, new, compelling and exclusive programming is just about the only thing that drives subscriptions today, and VOD services are spending wildly to produce and license it. Mere tonnage is simply table-stakes and no longer moves the needle.

Netflix alone spend somewhere between $15 and $20 billion this year on new content — or at least it was planning to before the latest setback.

That spending doesn’t seem to be buying what it used to, however. Whatever the correlation has been between content spend and subscriber growth, that relationship is breaking down, raising the obvious question of how long that level of spending can be sustained.

No surprise then, to see Netflix signaling it will produce fewer new series and movies this year than originally planned.

As a strategic matter at least, the peak TV wave has crested and is now breaking. The urgent question facing Netflix and the rest of the SVOD field is whether it can figure out how to keep swimming, or get swamped in the surf.