Netflix stock with price drop: Why the streaming service is facing difficult times

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Hold on tight:

Netflix wants to win new customers with new series like "Anatomy of a Scandal" (pictured Sienna Miller and director SJ Clarkson in London).

But the growth story is interrupted, the competition is increasingly affecting the streaming pioneer

Photo: Tim Ireland/EPA

Not so wild, you might think.

The world's largest streaming service Netflix still has around 222 million customers, increased its sales to almost eight billion dollars and still earned around $1.6 billion from January to March.

The drop of around 200,000 subscribers (0.1 percent of the subscriber base) is mainly due to the loss of 700,000 subscribers in Russia, where Netflix has temporarily suspended its operations.

This could be a classic cliffhanger: it seems dark and menacing for a moment, only to suddenly brighten up in the next episode.

But the opposite is the case.

Investors and analysts rated Netflix's latest quarterly figures as a "Welcome to the Horror Show", the start of a horror classic with many consequences.

Netflix boss

(61) did not even scare his fans with the statement that the number of customers is likely to fall by another two million in the second quarter.

But with the fact that Netflix wants to change its once celebrated business model, with which the stock market darling had grown up.

The new seasons, and that was a shocking moment, will probably run according to different rules.

The stock market reaction was clear.

The Wall Street darling lost around 25 percent of its market value overnight.

$40 billion vanished into thin air within hours.

Netflix stock, which started the year at $600, continued to fall in early U.S. trade on Wednesday, falling as low as $220.

The stock has lost more than 60 percent of its value since the beginning of the year and should be one of the biggest losers of the stock market year if Netflix doesn't quickly turn around.

This could be difficult indeed.

Netflix isn't suffering from a short-term external shock like the Ukraine war.

The streaming pioneer is struggling with structural problems: price pressure, increased competition and changing customer behavior are affecting the company.

The most important construction sites of Hastings and his team at a glance.

Suddenly more expensive: the price of strong growth

Netflix has grown strongly thanks to its competitive prices.

The multiple use of customer accounts was also an important factor in the rapid growth of the first few years: Young people in particular shared a Netflix subscription among three or four households, thereby taking advantage of a gap that the company had deliberately left open.

Netflix offers subscriptions that allow users to stream on up to four different devices at the same time and create four different profiles.

However, the restriction is noted in the terms of use that the subscribers must come from the same household.

Hardly anyone stuck to that for years, and for Netflix CEO Hastings too, “password sharing” was not a problem for a long time and “something you have to live with”.

Now Netflix doesn't seem to be able to live with that anymore and is considering a fine for users who share their password outside of the family.

According to the company, there are now more than 100 million households that use the service and do not pay for it.

This shows how great the need at Netflix is ​​now - and that the former formula for success for rapid expansion has gotten out of control.

Netflix has accustomed its customers to low prices and is now hitting them in a sensitive area: In Germany, the standard tariff (reception on two devices) now costs 12.99 euros, the premium tariff (four devices) 17.99 euros.

Netflix has increased prices in Germany three times since 2014.

Netflix competition is arming itself powerfully

A loss of two million subscribers in the current quarter (April through June) can be bearable for a market leader like Netflix -- as long as the decline proves to be a temporary phenomenon.

Netflix has had an incredible growth story over the past decade, acclimating its investors to the fact that its subscriber base is growing at around 20 million subscribers a year.

A deceleration or even an end to growth therefore comes as a shock to investors:

(57), alongside Hastings co-head of Netflix, had therefore sworn investors for months that the company would soon accelerate its growth again after a short break .

There is a simple reason why Netflix will hardly be able to keep this promise in the foreseeable future: the streaming pioneer is no longer alone.

The competition has also switched to streaming and massively upgraded.

The fight for market share, subscribers, studio capacity, licenses and expensive film stars is in full swing.

Customer choices are increasing and costs for providers are increasing.

Amazon and Apple aren't the only ones spending billions to steal Netflix customers with streaming services like Amazon Prime and Apple TV.

The entertainment giant Disney also promises its shareholders a golden streaming future with Disney+ and has invested heavily.

Accordingly, it will be difficult for Netflix to get licenses at all, which competitor Disney is now guarding like a treasure.

The merger of WarnerMedia and Discovery has created another streaming power player.

The US media and entertainment giants have accelerated their race to catch up with first mover Netflix.

The battle for streaming customers is getting tougher, and Netflix can no longer rely on hit series like "Stranger Things" or "Squid Game" to attract customers practically by themselves.

Years of rapid growth are now being followed by years of displacement and fierce competition.

The competition in numbers

Netflix currently offers 2500 movies and 900 series.

The streaming competitor Amazon Prime now offers access to more than 2400 films and 475 TV series and is thus fighting in the same weight class.

The Disney+ streaming service has only been active in Germany since 2020 and, with around 130 million subscribers worldwide, is significantly smaller than Netflix, but has an intact growth story.

In the fourth quarter of 2021, the group gained 11.7 million subscribers.

Revenue across all of Disney's streaming platforms, which includes Hulu and ESPN+, is up 34 percent year over year.

A German streaming service is also trumps: RTL has entered into a multi-year cooperation with Warner Bros. Germany and has thus significantly expanded its range.

The business figures for the third quarter of 2021 show that the number of paying subscribers to RTL's "TVNow" has more than doubled to 2.4 million users within a year.

In addition, with the NBC streaming service Peacock, which can be found in Sky's offer, another provider has been pushing into the market since January.

And after Amazon Prime, Amazon now also wants to push the IMDb TV platform into the market.

The new streaming service is available in the USA and Great Britain.

The offer is not financed by fees, but by advertising revenue and is therefore free of charge.

Flirt with advertising: is Netflix getting rid of its own model of success?

In view of this competition, Netflix boss Hastings is trying to break a double taboo.

For years, allowing customers to share their passwords has been part of the company's marketing and growth strategy.

Suddenly there is speculation about fines for such customers - and the risk of customers fleeing is accepted.

Even worse is that Hastings, in his need, apparently no longer has a problem with commercial breaks: "For customers who are tolerant of advertising and who want a cheaper subscription, such a model makes sense," said Hastings after presenting the figures for the first quarter .

One wants to test such advertising-financed models over the next few years.

Netflix is ​​thus copying a business model of those providers that the streaming service successfully displaced in its early phase.

Cable TV providers like HBO have also relied on advertising revenue from the very beginning - and countless customers have switched from cable TV to Netflix because the streaming service just didn't show any advertising.

For Netflix it would not only be a taboo break and a departure from the original model of success.

In the fight for advertising revenue and advertising space, the company would also bring in new, powerful competitors such as Facebook and Google.

When costs run away and growth slows, you need new sources of funding.

Higher subscription fees, penalties and advertising revenue could prove to be lucrative sources of money.

But they could be factors that collapse Netflix's success story.

It would be a perfect cliffhanger in the business thriller "Leave your roots - reinvent yourself."