Netflix wants to crack down harder on users who share their access data in view of falling customer numbers. A taboo-breaking move is also on the horizon: The streaming market leader is working on a cheaper version with advertising.

Investors are skeptical: the share temporarily slumped by around a quarter in pre-market trading on Wednesday.

Loss of the Russia business

For Netflix, it was the first quarter of customer attrition in more than a decade. In the three months to the end of March, the company lost about 200,000 paid subscriptions to its bottom line. While one reason for this was the halt to its Russia business following the invasion of Ukraine, which saw the loss of 700,000 customers in one fell swoop.

But even with the addition of 500,000 subscribers, Netflix would have fallen far short of its own forecast of 2.5 million. Worse still, the service expects to lose around two million customers in the current quarter. At the same time, Netflix has new episodes of hit series like “Stranger Things” and top-class films like “The Gray Man” with Hollywood star Ryan Gosling.

Overall, the global subscriber base fell to 221.6 million at the end of the quarter. How did it come to this? Management led by founder and co-chief executive Reed Hastings pointed to “factors beyond our control,” such as slower growth in the share of Internet-connected smart TVs, Russia’s war in Ukraine, and inflation, among others.

Millions of households freeloading

Above all, however, customers who share their login data with others are a thorn in Netflix’s side. The service estimates that more than 100 million households are free riders. When growth was high, it turned a blind eye, Hastings said. But now Netflix no longer wants to stand idly by.

“If they have, say, a sister who lives in another city and they want to share their Netflix subscription with her, that’s great. We’re not trying to stop that,” said chief product officer Greg Peters. “But we will ask them to pay a little more for it.” Netflix, for example, can determine where users are accessing the service from based on IP addresses. But it could be a year before the system is broken in and used worldwide, Peters said.

At the start of the Corona pandemic, Netflix was still considered one of the big winners of the crisis, with its customer base increasing by 37 million in 2020 alone. But now they say the surge has clouded their vision.

Netflix was initially able to gain land in the video streaming business almost unhindered as a pioneer. But now there’s more and more competition – from Disney, Amazon, Apple as well as Warner’s HBO Max, among others. If Hastings, with a touch of arrogance, named the online game “Fortnite” as the fiercest competitor a few years ago, he now admits that the competition has “brought out some very good movies and series.”

Industry observers also see a problem in Netflix’s strategy of flooding programming with a deluge of content, with quality sometimes falling by the wayside. In contrast, a rival like Disney relies on lavishly produced few series centered around popular characters from the worlds of “Star Wars” and Marvel, with one episode per week over a longer period of time to keep customers engaged.

Netflix with advertising in the future?

To get growth back on track, Netflix is even willing to shake one of its biggest taboos and introduce a cheaper subscription with interstitial commercial clips. There’s never been anything like it at Netflix – Hastings has had little use for it until now. While he remains a fan of the simplicity of subscriptions – “I’m even more of a fan of giving consumers a choice,” he said. Netflix is now open to the advertising model, he said. “We’re looking at that and trying to get that up and running in a year or two.” Details such as ad personalization could be left to others, he added.

The last time Netflix posted a quarter of declining user numbers was in October 2011. Despite the decline, Netflix remains well ahead of the competition. By comparison, its big rival Disney+ had just under 130 million customers at the end of 2021. However, Netflix also had to cut back on profits in the past quarter. Net income fell by around six percent year-on-year to 1.6 billion dollars (1.5 billion euros). Revenue increased by around ten percent to 7.9 billion dollars, but still just missed analysts’ expectations. The Netflix share had already fallen by over 40 percent since the beginning of the year. The quarterly report also put pressure on the share prices of other streaming providers.