Netflix's next moves will have big implications

Netflix’s business is at a precipice.

Why it matters: As the biggest subscription streaming service in the world, the company is not only a bellwether of its industry, but also of consumer discretionary spending and sentiment.

• Some of the biggest media and entertainment groups in the U.S. have earmarked more than $100 billion on content in 2022 to try to emulate Netflix’s model, the FT reports.
• Meanwhile, the pandemic’s wane, global inflation and geopolitical challenges are prompting consumers to shift their attention and budgets. 

Catch up quick: Excluding the suspension of its service in Russia, Netflix added a net 500,000 paid subscribers in the first three months of this year.

• Analyst expectations were for 2.7 million.
• Between now and the end of June alone, the company says it may lose 2 million paid subscribers or about 1% of its current total base.

Where Netflix takes itself from here will likely fuel a new rise in online advertising while diluting the quality of content for consumers.

• CEO Reed Hastings suggested the service could lower some prices by adding advertising components.
• After years of massive spending on content, the company yesterday also said it would pull back.

What they’re saying: “It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience,” Rich Greenfield, an analyst at Lightshed partners, wrote today.

The big picture: Streaming video platforms have matured and content options have hit (and probably way exceeded) a saturation point. 

• Our thought bubble: When Netflix points to incremental updates like the “double thumbs up” button so the service can offer better recommendations, it’s clear there’s very little wiggle room for innovation. 

• It’s also been 15 years since Netflix launched streaming. Since then, the number of competitors like Disney+ and Apple TV+, including short-form on demand and social video, have exploded. 
• Meanwhile streaming’s total share of TV viewing time is still less than 30%, according to Nielsen.

What to watch: Netflix says that well over half of the world’s homes with broadband don’t pay yet for its service. And that smart TV adoption will help fuel future growth.

• Axios' Felix Salmon also points out that Netflix's pre-pandemic net income, in the fourth quarter of 2019, was $587 million.
• Its earnings in this latest quarter came in at $1.6 billion on all-time record revenue of $7.9 billion, up $2.4 billion from pre-pandemic.