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Netflix and the impossibility of sustainable business

It's tricky, but some companies manage to hit the ceiling of people willing to consume their products and services. For Netflix — a paid platform, hence with a relevant entry barrier — it seems that the limit has been reached. What's next?

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In March 2017, Netflix posted on Twitter that “love is sharing a password.” It wasn’t just a social media joke. Just under a year earlier, in July 2016, the company had told Business Insider that its subscribers could “use their passwords however they want” as long as they don’t resell them.

Netflix has always been permissive about sharing passwords. While other companies that work with subscriptions, such as Spotify, are very strict with who can and who cannot enjoy shared access, Netflix, as the statements above attest, even encouraged this behavior.

It was good while it lasted! The Netflix spree seems to be (close to) over.

On Monday (18), Netflix released its results for the first quarter of 2022. For the first time since October 2011, more than a decade ago, the subscriber base has shrunk. Worse, it was a (bad) surprise, as the company had signaled to the market that the expectation for the period was to grow by 2.5 million subscribers. And it will worsen: the second-quarter forecast is for another shrinkage of 2 million accounts.

READ ALSO: Boosted by streaming services, global recorded music revenues reached $26 bln in 2021

The company’s letter to shareholders came full of justifications — beyond sharing passwords — for the negative performance.

Netflix blamed:

  • the heating of competition, with traditional media companies entering and succeeding in the streaming war (Disney Plus, HBO Max) and others with apparently infinite money to keep their ranks (Prime Video, Apple TV Plus);
  • As well as the end of the pandemic;
  • The war in Ukraine, the inflation;
  • and even the old TVs that are not “smart” and therefore do not access the internet and Netflix.

I wanted to focus the discussion, however, on shared passwords.

Netflix is present in 322 million households, but almost a third (31%) use other people’s passwords. That’s 100 million homes accessing Netflix without paying or splitting the bill with the de facto subscribers, the owners of the cards debited by the service.

READ ALSO: Amazon closes deal to buy MGM movie studio

The share of non-payers is so large that you probably know someone who is part of it. Maybe that someone is you. (I’m!)

The impact on Netflix‘s stock value was brutal. The paper, which had been devaluing since December 2021, plummeted ~40% the day after the financial results were released. Within hours, tens of billions evaporated on Nasdaq. It’s not every day that a stock chart draws such a deep cliff.

I have to say, though, that the market reacted to an obvious, predictable event but which capitalism seems to prefer to ignore: physical limits. It’s complex, but some companies manage to hit the ceiling of people willing to consume their products and services. For Netflix — a paid platform, hence with a relevant entry barrier — it seems that the limit has been reached. What’s next?

READ ALSO: Latin America surpasses the U.S. and Europe and is already the second fastest-growing streaming market in the world

Netflix still burns a lot of cash with its own productions and only stopped making debts in mid-2021. It still owes $14.6 billion and has $6 billion in cash. In this first quarter, the company’s revenues grew 9.8%, and Netflix earned $1.597 billion, a quarter of downshifting compared to the previous year.

But none of that matters if the prognosis is one of stagnation. Great companies are only ‘cool’ while growing and keeping shareholders satisfied. It is impossible to have a “sustainable business” on that scale.

So unless Netflix CEO Reed Hastings has a genius card up his sleeve, Netflix will likely start squeezing its lemons to make more lemonade — as all businesses do — damaging its outstanding user experience in exchange for more subscribers’ money and attracting those who do not consider paying for a subscription.

In the conversation with shareholders, Netflix executives recalled the test being carried out in Chile, Costa Rica, and Peru to charge an additional fee for a shared password outside the subscriber’s home and suggested the creation of cheaper plans with ads — a path in which domestic rivals are already treading (HBO Max, Hulu) or getting ready to walk (Disney Plus).

Yep, it was good while it lasted!