Netflix crisis: Why the reports of its death are grossly exaggerated

The news that Netflix has finally fallen to earth after losing some 200,000 subscribers in the first quarter of this year and the subsequent slump in its share price has evoked two extreme kinds of reactions. One is a cynical shrug of the shoulders from chronic sceptics who believe that all IT business is a big bubble simply waiting to implode; the other is of jaw-dropping disbelief: How did such a successful enterprise come to this? Both represent a misreading of the nature of the crisis at Netflix. No, it was not a bubble waiting to burst; but what has happened should surprise us given the inherent risks involved in running a business so completely dependent on customer choices in a highly competitive market.

Since the news broke on 20 April, the entire streaming industry has been thrown into turmoil amid dire predictions about its future. The Western media has been awash with breathless commentary declaring its imminent demise. Even the normally measured Financial Times couldn't resist a pop questioning its business model which “rested on the assumption that there is a global market of up to one billion households willing to pay for services”. That assumption, it suggested, was deeply flawed.

The Sunday Times trotted out anecdotal evidence to claim that “people are ditching their subscriptions in their droves”. Others have variously described Netflix’s troubles as a “moment of reckoning” and a “gut-wrenching moment” for an industry that until the other day was being hailed for revolutionising the delivery and consumption of entertainment. And was billed as the alternative to the struggling mainstream cinema.

So, how serious is the crisis? Is it really the end of the line for the streaming giants just when they were gearing up for bigger things? Is the show finally over?

The short answer, without playing down the gravity of Netflix’s problems, is: “No”. Reports of Netflix’s and the larger streaming industry’s imminent death are grossly exaggerated. This is not to ignore the rather stormy weather it is facing at the moment. Warner Bros. Discovery Inc is the latest media streaming giant to report a drop in its share value, and industry experts have warned that 2022 will be “noisy” and “a little messier” than what they expected. Brace for more dominoes to fall in the coming months.

But isn't that par for the course for a high-flying and risk-heavy enterprise?

The hard fact is that for all its supposed difficulties, the streaming business remains a multibillion-dollar industry — and is still expanding. We hear it has ambitious plans to scale up operations by investing in new projects and original programming. Look at the names: Netflix, Disney+, Warner Bros. Discovery, Paramount, Amazon Prime Video and AppleTV. These are big players with deep pockets and sufficient firepower to withstand passing storms.

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What is often overlooked is that it’s still a relatively young industry, barely 20 years or so old, and teething problems are inevitable especially given the competitive nature of the business, a difficult global economic situation, and an escalating cost of living crisis facing millions of its existing and potential customers.

Indeed, the real story is how despite such odds, Netflix & Co have done so well in a remarkably short period. Coming from almost nowhere to capture people’s imagination in the way they have— transcending geographical, demographic, and linguistic barriers. Particularly remarkable is the success of Netflix which started off as a DVD rental business in 1997, and it was only in 2007 that it got into streaming media.

Today, it has over 221.6 million subscribers worldwide — from the United States and Canada to Europe, the Middle East, Africa, Latin America and large swathes of Asia, including India. Where it’s not available such as mainland China and lately Russia it’s because of local restrictions, not because it doesn’t have audiences there or lacks the wherewithal to serve them. Today it’s hard to think of independent film distribution without Netflix popping up in your mind.

In the West, at least, it has become such a part of people’s everyday life that “Netflixing” is now used as a verb. Even after losing two million subscribers and despite a cloudy outlook for the rest of the year, it remains the biggest streaming platform worldwide. Though there are regional variations in terms of numbers, it’s consistently rated as the best in terms of original movie releases.

The point is not Netflix, but the fact that streaming has irreversibly changed the way the world once watched films and other forms of visual entertainment. So much so that across Europe and America, cinema halls have taken to streaming popular events to fill the vacuum caused by the decline of mainstream cinema.

Sociologists say that the idea of watching new and original cinema at the touch of a button has become too deeply entrenched into our imagination for it to fade away overnight just because one company, however popular, has lost a tiny fraction of its massive audience during one financial quarter for reasons that are yet to be established. Just as a swallow doesn’t make a summer, one rainy day doesn’t necessarily presage a long and messy monsoon.

Yet, to ignore the crisis or dismiss it as a consequence of factors beyond the industry’s control such as the global economic climate would be short-sighted, and mean storing more trouble for the future. Because there’s no point denying that everything is not entirely hunky-dory whatever the reasons. Certainly, something somewhere has gone wrong — or is not going according to plan — and calls for a hard-headed review to identify the fault-lines.

A broad sense of the incipient malaise has already started to emerge from the debate taking place in the media and industry circles. For one, the crisis has highlighted a high degree of complacency in the industry blinding it to customer feedback and criticism of some of its practices. And more importantly aspects of its business model which, it has now emerged, are based on too many fallacious assumptions.

The most fallacious, as American filmmaker Jason Blum pointed out, has been the assumption that it is somehow immune to the “usual gravitational forces of the quality and cost of their filmed entertainment”. Netflix and other streaming giants may have been born as tech companies not subject to the normal laws of investment and return but over the years they have come to be regarded more as media companies and therefore subject to the same pulls and pressures — namely the ability to keep both the investors and customers happy.

“Netflix, the great disrupter whose algorithms and direct-to-consumer platform have forced powerful media incumbents to rethink their economic models, now seems to need a big strategy change itself,” wrote Blum in The New York Times. And as someone who himself runs a successful streaming company, Blumhouse, he knows a thing or two about these things.

A major weakness of Netflix & CO’s business model, acknowledged even by sympathetic analysts, is a huge mismatch between their enormous investment in new content and the ability to gain new subscribers without losing the existing ones. This, they argue, has undermined Wall Street’s faith in the streamers’ capacity to maintain growth while “staying ahead of their astronomical costs” in a crowded field.

As The Financial Times noted, the model worked in a “period of easy monetary policy and a historic bull market run allowing the company to spend heavily so long as investors believed in strategy... But the sentiment has now changed”. The industry, however, appears not to have noticed. Or wilfully ignored the red flags such as when Paramount’s share price plummeted by nearly 20 per cent a day after it announced big investments in its Paramount Plus streaming service.

The industry has also been criticised for quietly switching from its previous pick ‘n’ mix model that allowed more consumer choice as it offered something to everybody to one-size-fits-all fare built around more talked-about film-makers.

“Now they increasingly want us all to have the same taste,” wrote one critic. Subscribers have also complained of abrupt shortening of “seasons” so that shows they expected to run over many seasons were suddenly curtailed without notice on the (mistaken) assumption that viewers needed a change. “Decisions are made on our behalf assuming what we want or don’t want rather than asking us what we want,” said one Netflix subscriber.

The Netflix crisis has forced the industry to rethink its business model and “we-know-best” approach towards subscribers. Which would have been unthinkable until a few weeks ago. In a way, the industry badly needed a crisis to shake it out of its complacency and comfort zone.

The author is an independent commentator on politics and culture. Views expressed are personal.

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