On Tuesday, Netflix announced its most recent quarterly earnings, and they were -- to say the least -- not great. Well, technically, they were the worst the company has ever reported, and the stock fell by 25 percent after the announcement.
It's a compelling lesson in what happens to a company on top with nowhere to go. Every business wants to get to the top, until they get there and realize that the pressure to continue to grow never ends. Sometimes it makes them do things they wouldn't otherwise do. That never ends well.
I mean, Netflix still made money, but it did so while recording its first ever drop in subscribers. That's a big problem for a company that already had a hard time finding new subscribers to add to its existing audience of more than 200 million. Now it's starting to lose them.
It lost 200,000 subscribers in the last quarter alone. That's especially bad considering Wall Street had expected the company to add 2.5 million, a number that was already considered tepid. It's even worse considering the company was coming off massive growth during the pandemic, only to hit a wall toward the end of 2021.
One of the main reasons is obvious: Netflix keeps raising prices. It increased the price of its most popular plan to $15.49. If you want to watch movies and tv shows in 4K, you'll have to spend $19.99. The thing is, there's only so much money people are willing to pay for what seems like an endless stream of Ryan Reynolds movies. I don't know what amount is, but it certainly isn't infinite.
The company, however, likes to blame things like competition with other streaming services and the fact that its existing users are naughty for sharing their passwords. Nothing like blaming your customers for the fact that you can't find anyone else to pay for your overpriced service.
To be fair, Netflix says there are 100 million households that don't pay for its service, but instead share passwords. The company has taken steps to limit password sharing after basically looking the other way for a decade or so. For example, it started testing a prompt that would notify users that they have to sign up for their own account or lose access.
It's almost as though no one at Netflix considered that there might be a direct relationship between those 100 million password-sharers and the fact the company continues to raise its already high prices compared with the competition. There's a point at which a college student who moves away from home just isn't going to spend $15 to $20 per month when they can just keep logging in with mom and dad's account.
Still, if you're Netflix, you can't just start lowering your monthly subscription cost. The same shareholders who care deeply that Netflix is no longer adding new subscribers would very much be angry if it started making less money as well.
Except -- and hear me out -- if customers leave your service, they aren't paying you anything. Less money seems like it's better than no money, especially when it is incremental revenue like getting paid to send bits of video over the internet, which costs you exactly zero more dollars to distribute to any additional individual subscriber.
Someone at Netflix seems to have convinced CEO Reed Hastings of this, because, in a recorded interview during the earnings call, Hastings conceded that the company is looking at an advertising-supported lower-priced tier. That's a shocking admission from a CEO that has historically been publicly opposed to ever showing ads.
"Those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription," Hastings said. "But I'm a bigger fan of consumer choice and allowing consumers who would like to have a lower price and are advertising-tolerant get what they want."
I suppose that's a nice way of saying that you realize the only way you get people who are currently paying zero dollars to sign up for a service that will cost them more than zero dollars is to make it a lot closer to zero dollars than whatever it is now. If it takes showing ads to get the price lower, I suppose that's one option.
It would certainly be a game-changer for Netflix. Plenty of streaming services show ads at the beginning, in the middle, or at the end of tv shows and movies. Netflix has just never been one of them.
There are, of course, a few problems. The biggest is the most obvious -- Netflix isn't an advertising company. It has no ad sales team or technology. It's starting from a very real disadvantage and there are a lot of things that could go wrong to tarnish its brand.
Also -- and probably more important -- ad-supported streaming services are bad at any price that isn't free. Even then, they are bad, but they are at least tolerable. (Barely.) The solution to "not enough people are paying us for our service" isn't to deliver a worse experience at a lower price.
This is what happens when you start to believe your own narrative. Netflix might believe that it is delivering value for the price. It can tell itself stories about how the amount of money it spends on original content makes it a premium service. The thing is, a lot of people don't agree. If they did, they'd be subscribers.