Why Netflix is a victim of its own success

The massive turnaround in the company’s — or at least the stock’s — fortunes may obscure the extent to which Netflix, or at least streaming, has won.

Netflix estimates that around 330 million households use its service — and 100 million aren’t paying. Its newer, sometimes buzzier, competitors lag behind those numbers. (Disney+ has 130 million subscribers and Hulu has 45 million.) Normally, this would be great news for Netflix, but it has become an interlocking structural problem for the streaming pioneer.

“We got great competition. They’ve got some very good shows and films out. And what we’ve got to do is take it up a notch,” Netflix CEO Reed Hastings said.

The company even said it would consider advertising to find new revenue, long thought to be a line it would dread crossing, and said it would try to find a way to turn password sharers into Netflix payers. The company cited not just increasing competition but also the persistence of password sharing. In short, so many people love watching streaming television but not always paying for it, or at least from Netflix.

Netflix needs to find new ways to meet expectations of growth

Netflix, as the first to enter the streaming market, stands above its competitors, but slowing growth or losing subscribers, even from a market-dominant position, are problems that have plagued many new companies in recent years.

In a chart included with its investor letter, the company showed the “share of total U.S. TV time” devoted to streaming had increased from 26 percent to 28.6 percent from May 2021 to February of this year. Netflix, which controls the biggest chunk of that streaming time, increased its share from 6 percent to 6.4 percent, while Disney+ grew from 1 percent to 1.7 percent, and other subscription video on demand services including free, ad-supported services like Tubi, grew from 8 to 8.5 percent.

So now, Netflix is faced with trying to turn more of its viewers into payers. But those who aren’t paying may be going elsewhere with their streaming dollars.

“We realized, with all of the account sharing, which we’ve always had, that’s not a new thing, but when you add that up together, we’re getting pretty high market penetration. And that, combined with the competition, is really what we think is driving the lower acquisition and lower growth,” Hastings said on a call with analysts.

Outside analysts were more skeptical that measures to reduce password sharing — or to turn password sharing into Netflix paying — would bear fruit quickly.

“New ambitions to monetize password sharing and introduce advertising to re-accelerate growth are years away from having an impact,” analysts at Morgan Stanley said in a note to clients.

“We don’t believe that this strategy will be the panacea that some investors have outlined over the last few years. Netflix may be able to squeeze a few more dollars out of some of the primary households, but we think that other ones will look at the new sharing fee as another pricing increase and cancel,” Morningstar analyst Neil Macker wrote in a note.

Netflix isn’t just competing with other streamers

When everyday life massively changed over two years across much of the world, Netflix benefited, to the point of obscuring its structural issues. “In some countries that we’re operating in, where we’ve been operating the longest, like the U.S. is a great example, we have really significant high penetration of viewers into that near-term market potential. And that was really boosted by sort of this growth at the beginning period of covid and the lockdown,” Netflix’s Chief Product Officer Gregory Peters said on the analyst call.

Now that Americans are returning to normal, Netflix is in the business of competing with life off the couch as well as other streamers.

Ultimately, Netflix has to produce a service that millions of people around the globe who haven’t already started paying for will want to keep paying for — or at least watch some ads.

“Many of the households that don’t pay may not view the service as valuable enough to pay for,” Macker wrote.

People love streaming Netflix’s content. Whether investors will be happy with that remains to be seen.