SHARE THIS

I recently discussed with a friend how Netflix seems to lack many exciting new shows and movies lately, with fewer reality programs, staler content ideas, and recommendations flooded with Korean productions. To be honest, apart from some well-known Korean dramas over the years, I don’t have much interest in what Netflix is recommending. Sure enough, Netflix recently released its disappointing performance, losing 200,000 subscribers in Q1 this year. Industry observers have analyzed the reasons behind the shocking user number decline. But the cause was already spelled out by its CEO Reed Hastings in a letter to shareholders back in 2018.

Promoting Cheaper Ad-Supported Platform

For the first time in over a decade, Netflix recorded a shocking drop in the number of subscribers, while the market had expected an addition of 2.5 million users. After the outbreak of the Russia-Ukraine war, the company exited Russia earlier last month, losing up to 700,000 users. Even if this factor is excluded, the net additions last quarter were only 500,000. The company still expects to lose another 2 million subscribers.

Netflix blames the password sharing, claiming that an estimated number of over 100 million households are accessing accounts without paying. They plan to crack it down, with first measures to be tested in Latin America before being promoted to other countries. Netflix also intends to launch a cheaper ad-supported platform.

If we look back, the streaming craze took off during the pandemic, a great time for the platforms like Netflix and Disney+, as the lockdowns led to surging household subscriptions. Netflix currently has about 222.6 million paying subscribers globally. In 2020, it added 36 million users, with Q1 net income reaching $1.7 billion, close to its 2019 whole-year profit of $1.87 billion. 2021 also saw 18.2 million new members, with the mega-hit Squid Game becoming the first work ever to surpass 1 billion views. Q2 net income remained robust at $1.45 billion.

Video Game Outperformed Traditional Media in Revenue

After all, “a moment of glory is not eternal.” Netflix understands this deeply. Back in 2018, Netflix’s CEO Reed Hastings wrote in a letter to shareholders, stating that Netflix’s main competitor was not cable TV channels or other streaming platforms, but video games like Epic Games’ Fortnite. While streaming media faced declining subscribers, Epic Games Store announced over 194 million PC users in 2021, up 34 million from roughly 160 million in 2020. Player spending on games on the Epic Games Store also rose 20% year-over-year, from $700 million in 2020 to $840 million in 2021.

Years later, it was not until last July’s earnings call that Netflix finally announced its foray into gaming, developing games based on original shows to provide a gaming service for subscribers and enhance the service experience. The company has since launched five games, including two derived from the hit show Stranger Things - Stranger Things: 1984 and Stranger Things 3, while the popular card game Exploding Kittens is set for release in May this year with an animated series adaptation planned for 2023.

In 2020, revenue from video games was already 3.6 times that of movies and 7.6 times that of music. The global games market generated $175.8 billion in 2021, 50% of which was from Asia-Pacific. Driven by the mobile gaming market, China was the fastest growing country. By entering gaming now, Netflix aims to build an interactive film/TV platform engaging with players. Though it seems belated, it may still prove a way out.

Learn more: https://www.nikkoam.com.hk/etf