Netflix lost almost 1 million subscribers in the spring — still fewer than predicted

Netflix shed almost one million subscribers during the spring amid tougher competition and soaring inflation that's squeezing household budgets, heightening the urgency behind the video streaming service's effort to launch a cheaper option with commercial interruptions.

The April-June contraction of 970,000 accounts, announced Tuesday as part of Netflix's second-quarter earnings report, is by far the largest quarterly subscriber loss in the company's 25-year history.

It could have been far worse, however, considering Netflix management released an April forecast calling for a loss of two million subscribers during the second quarter.

Netflix was probably spared from deeper losses by the ongoing popularity of Stranger Things, its science fiction/horror series that debuted in 2016. Following the release of the series' fourth season in late May, Netflix said, viewers watched a total of 1.3 billion hours of it over the next four weeks — more than any other English-language series in the service's history.

The less severe loss in subscribers, combined with an outlook calling for a return to growth in the July-September period, helped lift Netflix's battered stock by seven per cent in extended trading after the numbers came out.

Netflix co-CEO Reed Hastings didn't try to sugarcoat things during a Tuesday conference call about the results. "It's tough losing a million subscribers and calling it a success," he said.

The company's April-June regression follows a loss of 200,000 subscribers during the first three months of the year, marking the first time Netflix's subscriber totals have shrunk in consecutive quarters since its transition from offering DVD-by-mail rentals to video streaming began 15 years ago.

The loss of nearly 1.2 million subscribers during first half of this year also provides a stark contrast to the pandemic-driven growth that Netflix enjoyed during the first half of 2020 when its streaming service picked up nearly 26 million subscribers.

Despite the downturn, Netflix still earned $1.4 billion US, or $3.20 per share during the quarter, a 6 per cent increase from the same time last year. Revenue rose 9 per cent from the same time last year to nearly $8 billion.

Netflix ended June with 220.7 million worldwide subscribers, far more than any of its new competitors such as Walt Disney Co. and Apple. And in a hopeful sign, Netflix management predicted its service will add about 1 million subscribers during the July-September period, signaling the worst of its slump may be over.

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Although Netflix's springtime subscriber losses weren't as bad as investors and management feared, the downturn served as a grim reminder of the challenges now facing the Los Gatos, California, company after a decade of unbridled growth.

Netflix's stock price has plunged by nearly 70 per cent so far this year, wiping out about $180 billion in shareholder wealth. Since then, other video streaming services have made big strides in attracting viewers, with Apple winning accolades for its award-winning line-up of TV series and films while Disney's popular line-up of family-friendly titles continues to gain traction.

Netflix raising prices, branching out

At the same time, Netflix has been raising its prices to help pay for its own original programming, just as the highest inflation rates in 40 years have led consumers to curb spending on discretionary items such as entertainment.

"Netflix is still the leader in video streaming but unless it finds more franchises that resonate widely, it will eventually struggle to stay ahead of competitors that are after its crown," said Insider Intelligence analyst Ross Benes.

Sensing potential trouble brewing, Netflix began branching out last year by adding free video games to its streaming service.

But that obviously hasn't been enough to propel subscriber growth, prompting Netflix's April announcement that it will crack down on the rampant sharing of subscriber passwords and take another step it once scorned by offering a less expensive tier of its service that will include commercial interruptions.

Without providing further specifics, Netflix said Tuesday that both the ad-supported plan and the crackdown on password sharing will begin early next year. The company didn't say how much the streaming option with commercials will cost.

Netflix took another step toward putting together the ad-supported option last week when it announced it will team up with Microsoft to deliver the commercials.

"We have some headwinds right now and we are navigating through them," Netflix co-CEO Ted Sarandos said at the end of Tuesday's conference call.

"We've seen entertainment formats come and go, we've seen entertainment business models come and go, and we have managed to grow through all of them, though all kinds of economic conditions and through all levels of competition."