Netflix lost nearly 1 million subscribers and breathes a sigh of relief

LOS ANGELES (NYTIMES, REUTERS) - Netflix on Tuesday (July 19) averted its own worst-case scenario of subscriber losses, posting a nearly 1 million drop from April through June, and predicted it would return to customer growth during the third quarter.

When Netflix announced that it lost 200,000 subscribers in the first quarter and expected to lose many more in the second, it suggested to many in Hollywood and on Wall Street that the halcyon days of endless growth in the streaming business had come to an end.

The company still had a rough three months, but it did see its revenue grow 9 per cent to US$7.9 billion (S$11 billion), a number that would have been higher had the value of the dollar not pushed down the value of currencies around the globe. And it told investors it could add back 1 million subscribers in the coming quarter. Netflix now has about 220.7 million subscribers worldwide.

"First and foremost, we need to continue to improve all aspects of Netflix," the company wrote in its shareholder letter, adding that its focus would remain on its core service of providing streaming content to subscribers while not worrying about other potential revenue streams like its primary competitors do.

"This freedom means we can offer big movies direct to Netflix, without the need for extended or exclusive theatrical windows, and let members binge-watch TV if they want, without having to wait for a new episode to drop each week," the company added.

"This focus on choice and control for members influences all aspects of our strategy, creating what we believe to be a significant long-term business advantage."

Netflix has spent the past three months adjusting its business to better meet the challenges it expects to face the rest of the year. The company laid off about 450 employees.

In April, it announced it would introduce a less expensive subscription tier that would feature advertising - reversing its long-held stance to never have commercials on its service. Netflix intends to start its lower-cost advertising tier in the early part of 2023 in a "handful of markets where advertising spend is significant", a development analysts are cautiously optimistic about.

"Beyond additional subscriptions, ads will also provide an upside to Netflix in the form of a new revenue stream from brands that are eager to reach the platform's addressable audience," said Mr Mike Proulx, a vice-president at Forrester. "But scaling its ad business will take time."

And Netflix said it would begin to crack down more forcefully on password sharing to effectively monetise the 100 million users who use its service without paying for it. On Tuesday, Netflix said it launched two approaches to this in Latin America to learn which is more effective. One allows customers to "add extra member", and the other allows users to "add a home" for an extra US$3 a month.

"Not only were losses not as bad, but expecting growth in Q3, even if it is modest growth, is probably pretty encouraging to people," said Mr Richard Greenfield, managing director at LightShed Ventures, adding that the company's pronouncement that it was expecting substantial free-cash-flow growth in 2023 was the most significant news of the quarter.

"They are basically saying that while everyone else in the industry is losing billions of dollars, not only are they making money in 2022, they are going to make a lot of money in 2023 and beyond."

In addition to its business issues, Netflix received fewer Emmy nominations this month than its primary rival, HBO, despite featuring more programming than the cable network and its streaming offshoot, HBO Max. HBO picked up 140 nominations to Netflix's 105, a metric that emphasises the difficulty of continually producing quality, buzzworthy entertainment.

Wall Street soured on the streaming giant after its first quarter report, with shares of Netflix down 46 per cent since April and down close to 70 per cent since the beginning of the year.

Netflix shares rose more than 7 per cent in after-hours trading on Tuesday.

In the second quarter, Netflix lost 1.3 million subscribers in the United States and Canada, compared with a loss of 400,000 for the same period in 2021. It increased revenue 10 per cent and said subscriber retention improved over the course of the quarter.

Revenue in the Asia-Pacific region grew 23 per cent, and the company added 1.1 million subscribers in the region. In Latin America, subscriptions stayed flat but revenue increased 19 per cent from a year earlier.

The service was specifically buoyed by the strong performance of Season 4 of Stranger Things, which Netflix said generated 1.3 billion hours viewed, the most for an English-language show. The show also became a pop culture sensation by featuring the songs Running Up That Hill by Kate Bush and Master Of Puppets by Metallica, which saw a renewed surge in interest.

Netflix's film gains were more modest. "We're making good progress in film," the letter said. Hustle, the Adam Sandler basketball movie, generated the most user interest in the quarter, with 186 million hours watched. Senior Year with Rebel Wilson grabbed user attention for 161 million hours. The company is investing more in animation, announcing on Tuesday that it had acquired the Australian animation studio Animal Logic.

Despite the upbeat forecast for the third quarter, some analysts remain concerned that the series and movies Netflix has coming the rest of the year will suffer in comparison with its competitors' offerings.

"To me, the big issues are the quality of the content," said Mr Matthew Harrigan, an analyst at Benchmark. He pointed to HBO, which will be releasing its Game Of Thrones prequel, House Of The Dragon, in August, while Amazon is unveiling Lord Of The Rings: The Rings Of Power in September.

"The Crown on Netflix is probably the highest-profile Q4 show they have," he added.