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Netflix: rise, fall and recovery

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During the first two quarters of 2022, Netflix lost millions of subscribers, revenue and profit declined and its share price and market capitalization deteriorated. Deanna Kathleen de Zilwa discusses how and why a company with such a strong track record as Netflix can experience this crisis and, most importantly, how it overcame the crisis and returned to growth.

Image courtesy of interviewee. April 12, 2024

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This video video discusses Netflix's evolution as a leader in the Subscription Video on Demand (SVOD) industry. Founded in 1997 as a DVD rental service, Netflix transitioned to streaming in 2007 and now operates in 190 countries, offering a wide range of genres in multiple languages. The discussion highlights Netflix's growth during the 2020-2023 period, especially the surge in subscriptions during the pandemic lockdowns, followed by a significant decline in subscribers and stock value in 2022 as audiences returned to normal life.

This video video explores Netflix’s recovery strategies, including the introduction of an advertising tier—a shift from CEO Reed Hastings's previous opposition to advertising. Netflix implemented this by partnering with Microsoft and also capitalized on account sharing by monetizing it, which could generate substantial additional revenue. Furthermore, Netflix has ventured into mobile gaming, recognizing the industry's potential.

Challenges facing Netflix include intensified competition from other streaming services and shifts in viewership habits among younger generations who prefer user-generated and mobile content over traditional TV and films. There's also a prediction that mergers and acquisitions may occur in the industry, particularly as Netflix approaches saturation in established markets and seeks to expand into emerging ones. This video video concludes by emphasizing the importance of continuing to study and understand the dynamics of the streaming industry.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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Netflix is known as the first mover in

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what is called the SVOD industry, which stands for

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subscription video on demand industry.

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And as the first mover, it has become the market leader.

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Um, it was founded in 1997 as a DVD rental company,

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in the United States,

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but it has now spread its footprint globally.

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And, since 2007, it has been streaming entertainment,

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TV shows and movies available,

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on internet enabled devices.

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So smart TVs, desktops, iPads,

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smartphones, gaming consoles as well.

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They rose very quickly

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and I would identify, a couple of factors

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as being responsible for their rise.

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One of them is that, technological, capacities,

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their innovative capacities right from the early foundation,

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they have had an amazing algorithm, which has allowed them

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to gather data from users about users' preferences.

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And they've used this data to create customized,

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recommendations for individual users.

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So each individual user, when they log on to the Netflix

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platform, is actually getting a completely different,

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home screen to another user.

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So the other element of their, operations,

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which is being particularly innovative, is the breadth

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of their operations.

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They're in 190 countries around the globe,

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and the range of genres of their, TV programs

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and movies is extraordinary in many languages,

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reflecting many cultural, traditions and norms.

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And the genres that they cover are very, very wide.

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So animation, children's documentaries, crime action,

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romance.

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So there's something to appeal to everybody.

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So the study focuses, it's published, by Emerald,

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and the paper is called, Netflix Rise,

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fall and Recovery.

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It's available from the Journal of Business Strategy.

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So the study covers the three year period from 2020

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to 2023.

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So the first part of the study tracks their exponential

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growth trajectory during the first

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two years of the pandemic.

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And as everybody knows during that period of time,

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most cities in the world, governments

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before the vaccines were implemented,

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had stay in place orders, lockdowns,

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where people couldn't go to work

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unless they were essential workers.

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And so they were stuck at home.

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And so what they many people did then is they took out

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Netflix subscriptions.

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But then once the vaccine rollout, emerged

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around the first world in particular

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and businesses started to reopen, the decline came about in,

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Um, the first quarter of 2022

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when they lost first 200,000 subscribers.

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And then, the share price declined by 35%

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and $50 billion was wiped off the valuation of the company.

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The situation got worse in second quarter of 2022

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when, they lost almost a million subscribers

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and the share price declined, by,

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an almost 60%.

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And, the valuation was declined

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by a further $70 billion.

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Um, so it was an extraordinary severe decline.

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So what I found fascinating in the study was really focusing

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on how were they able to recover

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because, you know, it's, a lot of companies would've,

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been decimated by such a, you know, drastic

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reduction in their profitability,

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but Netflix was actually able to recover.

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So that's one of the other key things that I looked at.

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The methods, I'm a qualitative researcher,

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so it's a qualitative case study.

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And what I did, the primary source data is

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all publicly accessible.

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So from Netflix's own webpage,

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from its investor relations webpage, I accessed

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what are known as the earnings call transcripts.

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So there are 13 of those.

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So the transcripts actually come with a video.

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So, the methodology that I used was watching the video

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and analyzing what I saw in with the written transcript

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as well as the letters to shareholders.

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So there were 13, of those sets.

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And then the supplementary secondary data included,

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articles written by investment analysts by journalists,

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as well as, traditional academic journal articles

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and monographs as well.

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Um, there's some fascinating material which has been

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published,

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from the IT perspective talking about the actual,

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how the detailing, how the algorithm actually works.

05:00.455 --> 05:03.275
So it was a very large data set that I used.

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A lot of other executives in a lot

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of other companies would've said, you know,

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this will just fix itself naturally,

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we don't need to do anything.

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But the executives of Netflix took ownership

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of the situation

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and actually were prepared to reverse,

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decisions that they'd made.

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So there's a couple of factors that I identify as,

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being responsible for the turnaround.

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One of them was the implementation of an advertising,

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subscription.

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Now previously, Reed Hastings, who was the one

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of the founders of the company

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and the CEO of the company, had a longstanding position

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of being, against advertising.

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But when they lost so much revenue

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and the company was in severe, you know, dire straits,

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he decided that it would be worthwhile

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implementing advertising.

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And so they launched the advertising, tier

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of subscriptions, but they did it in a very, careful,

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the tactics they used were very careful and prudent.

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They partnered with Microsoft who had the

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existing technology and relationships

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with brands to do that.

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And so they were able to take this initiative from

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idea to implementation within a six month period.

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And it was such a sensible thing to do

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because it actually gave them an additional revenue stream.

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And then they followed that up by,

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in first world markets such as the USA Canada, uk,

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and Australia and a couple of other countries

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removing the basic tier.

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And so that tactically, that was a very clever move

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because it pushed those who were looking

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for a cheap subscription towards the advertising tier.

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So they were then getting revenue from two sources.

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The other factor that I'd identify is

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that they became aware, the executives became aware

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of the fact that there were up

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to a hundred million people accessing Netflix for free.

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And so they decided to monetize account sharing.

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And they, there again,

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their technological sophistication enabled them to use,

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techniques to actually, track the ID IP

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and, geolocate the devices location.

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And so, that, that then prompted users to enter a code.

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And through that they were actually able to identify

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who was sharing their account,

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and they then began to charge those people

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for sharing that account.

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And there's some research that's been done recently,

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which has indicated that this is potentially going

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to yield an additional 700 million over the next year.

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So that's another very, very significant factor.

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And the third factor is they introduced

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what is potentially going to be a very lucrative,

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revenue stream.

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So they went into mobile gaming.

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Now the mobile gaming industry is an enormously

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lucrative business, generating

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around 600 billion globally a year.

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And what they have done there, they purchased, they,

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they've made some very careful acquisitions of existing,

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gaming studios,

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and they also developed some in-house capacities themselves

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in that space.

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And to date, they haven't yet charged users

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for their mobile gaming.

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But when you review the earnings call transcripts,

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it's very clear that that is on the agenda

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and that will strengthen their strategic position

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because it will give them an additional

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supplementary revenue stream.

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The conclusions are that I think, as I identified,

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it's the flexibility, honesty,

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and integrity of the executives to,

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really address the crisis head on, and not try

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and deny responsibility for that.

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And also, acknowledging, that some

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tactics they wanted to use, such as the rollout

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of the advertising, they didn't have, the capacities

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to do that internally, so they formed partnerships.

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So this honesty

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and sensible decision making of, you know, knowing when

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to partner with somebody else.

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So, moving forward,

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because it is such a massive, industry,

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predictions are that, by 2029,

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it's expected to generate $429 billion

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of revenue by globally by 2029.

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And as I'm saying, it's a very, very hotly contested market.

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And I was thinking about two things

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that have happened recently.

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One of them, the competitors moving.

09:57.345 --> 10:01.045
So for instance, in the uk, over the first three months

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of the year, Disney, discounted its subscription to,

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one pound 99.

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And so Disney during that first quarter was actually able

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to outperform Netflix.

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And then, on a, on the other side of the world,

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in the United States, ESPN, which is actually owned

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by Disney, which is a massive global streaming service,

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has announced a partnership in February, 2024 with Fox

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and with, discovery, they're gonna create a new app

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and the, they have, the, the rights

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to stream the four major sports in the United States,

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so NFL, the football, NBA,

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the basketball, baseball and hockey.

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And they're also going to stream NASCAR Racing Plus,

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they're going to stream the FIFA World Cup

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and the next FIFA World Cup is coming up in 2026.

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So I identify the moves of competitors

11:03.665 --> 11:06.365
as being a major challenge for Netflix.

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And in addition to that, there's a demographic trend,

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which is actually a challenge for the company.

11:12.585 --> 11:14.245
And, and it's actually a challenge

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for all streaming services, and that is that Gen Z

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and millennials actually don't watch linear tv

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and their attendance at traditional films is actually

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quite small as well.

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They prefer, user generated content such as,

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short clips that are available on YouTube or TikTok.

11:36.785 --> 11:38.325
Um, they are

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very interested in streaming music on and,

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and podcasts on, on Spotify.

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And, they're also very keen on, gaming.

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So one of the big challenges for Netflix and

11:53.065 --> 11:56.205
For the other streaming companies is going to

11:56.795 --> 12:00.765
attract in the fir in the first place that, that, cohort

12:00.875 --> 12:03.925
that generation of people and then retain those people

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because to date they've sort of relied on older generations

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of people, baby boomers and Gen X.

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And once those people die, they're going to have

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to actually modify their business model,

12:17.025 --> 12:19.645
to capture that younger cohort.

12:20.225 --> 12:22.605
So that's one of their big challenges going forward.

12:23.065 --> 12:27.485
And I actually predict that there will be, some mergers

12:27.485 --> 12:29.805
and acquisitions within the industry space,

12:29.925 --> 12:32.845
because particularly in first world markets, I mean,

12:32.845 --> 12:35.845
they've almost, Netflix is in the United States has almost

12:35.845 --> 12:37.765
reached saturation point,

12:38.345 --> 12:42.525
and so they're gonna need to move into emerging markets,

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and they've faced challenges around that.

12:44.845 --> 12:47.685
I just looked at an article that was published yesterday

12:48.055 --> 12:52.045
where Thena Vietnamese government is challenging,

12:52.455 --> 12:55.245
their rollout of gaming within that country.

12:55.545 --> 12:59.885
So there are, it's a very evolving, very dynamic industry

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and there are lots of challenges in,

13:02.225 --> 13:03.285
in the future for Netflix.

13:03.665 --> 13:06.565
So yes, I would recommend anyone interested in it

13:06.565 --> 13:07.685
to keep studying it.

Netflix: Rise, Fall, and Strategic Recovery

00:00:00 - Netflix is known as the first mover in what is called the SVOD industry, which stands for subscription video on demand industry. And as the first mover, it has become the market leader. it was founded in 1997 as a DVD rental company, in the United States, but it has now spread its footprint globally. And, since 2007, it has been streaming entertainment, TV shows and movies available,
00:00:34 - So smart TVs, desktops, iPads, smartphones, gaming consoles as well. They rose very quickly and I would identify, a couple of factors as being responsible for their rise. One of them is that, technological, capacities, their innovative capacities right from the early foundation, they have had an amazing algorithm, which has allowed them
00:01:08 - And they've used this data to create customized, recommendations for individual users. So each individual user, when they log on to the Netflix platform, is actually getting a completely different, home screen to another user. So the other element of their, operations, which is being particularly innovative, is the breadth of their operations. They're in 190 countries around the globe,
00:01:40 - and movies is extraordinary in many languages, reflecting many cultural, traditions and norms. And the genres that they cover are very, very wide. So animation, children's documentaries, crime action, romance. So there's something to appeal to everybody. So the study focuses, it's published, by Emerald,
00:02:10 - fall and Recovery. It's available from the Journal of Business Strategy. So the study covers the three year period from 2020 to 2023. So the first part of the study tracks their exponential growth trajectory during the first two years of the pandemic. And as everybody knows during that period of time, most cities in the world, governments before the vaccines were implemented, had stay in place orders, lockdowns,
00:02:40 - unless they were essential workers. And so they were stuck at home. And so what they many people did then is they took out Netflix subscriptions. But then once the vaccine rollout, emerged around the first world in particular and businesses started to reopen, the decline came about in, the first quarter of 2022 when they lost first 200,000 subscribers. And then, the share price declined by 35%

Netflix's Subscriber Loss and Strategic Recovery

00:03:14 - The situation got worse in second quarter of 2022 when, they lost almost a million subscribers and the share price declined, by, an almost 60%. And, the valuation was declined by a further $70 billion. so it was an extraordinary severe decline.
00:03:44 - on how were they able to recover because, you know, it's, a lot of companies would've, been decimated by such a, you know, drastic reduction in their profitability, but Netflix was actually able to recover. So that's one of the other key things that I looked at. The methods, I'm a qualitative researcher, so it's a qualitative case study. And what I did, the primary source data is all publicly accessible. So from Netflix's own webpage,
00:04:16 - what are known as the earnings call transcripts. So there are 13 of those. So the transcripts actually come with a video. So, the methodology that I used was watching the video and analyzing what I saw in with the written transcript as well as the letters to shareholders. So there were 13, of those sets. And then the supplementary secondary data included, articles written by investment analysts by journalists,
00:04:47 - and monographs as well. there's some fascinating material which has been published, from the IT perspective talking about the actual, how the detailing, how the algorithm actually works. So it was a very large data set that I used. A lot of other executives in a lot of other companies would've said, you know, this will just fix itself naturally, we don't need to do anything. But the executives of Netflix took ownership
00:05:17 - and actually were prepared to reverse, decisions that they'd made. So there's a couple of factors that I identify as, being responsible for the turnaround. One of them was the implementation of an advertising, subscription. Now previously, Reed Hastings, who was the one of the founders of the company and the CEO of the company, had a longstanding position of being, against advertising. But when they lost so much revenue
00:05:50 - he decided that it would be worthwhile implementing advertising. And so they launched the advertising, tier of subscriptions, but they did it in a very, careful, the tactics they used were very careful and prudent. They partnered with Microsoft who had the existing technology and relationships with brands to do that. And so they were able to take this initiative from

Netflix's Strategic Moves for Revenue Growth

00:06:21 - And it was such a sensible thing to do because it actually gave them an additional revenue stream. And then they followed that up by, in first world markets such as the USA Canada, uk, and Australia and a couple of other countries removing the basic tier. And so that tactically, that was a very clever move because it pushed those who were looking for a cheap subscription towards the advertising tier. So they were then getting revenue from two sources.
00:06:53 - that they became aware, the executives became aware of the fact that there were up to a hundred million people accessing Netflix for free. And so they decided to monetize account sharing. And they, there again, their technological sophistication enabled them to use, techniques to actually, track the ID IP and, geolocate the devices location.
00:07:27 - And through that they were actually able to identify who was sharing their account, and they then began to charge those people for sharing that account. And there's some research that's been done recently, which has indicated that this is potentially going to yield an additional 700 million over the next year. So that's another very, very significant factor. And the third factor is they introduced what is potentially going to be a very lucrative,
00:07:57 - So they went into mobile gaming. Now the mobile gaming industry is an enormously lucrative business, generating around 600 billion globally a year. And what they have done there, they purchased, they, they've made some very careful acquisitions of existing, gaming studios, and they also developed some in-house capacities themselves in that space.
00:08:31 - for their mobile gaming. But when you review the earnings call transcripts, it's very clear that that is on the agenda and that will strengthen their strategic position because it will give them an additional supplementary revenue stream. The conclusions are that I think, as I identified, it's the flexibility, honesty, and integrity of the executives to, really address the crisis head on, and not try
00:09:03 - And also, acknowledging, that some tactics they wanted to use, such as the rollout of the advertising, they didn't have, the capacities to do that internally, so they formed partnerships. So this honesty and sensible decision making of, you know, knowing when to partner with somebody else. So, moving forward, because it is such a massive, industry,

Future Challenges for Netflix in Streaming Market

00:09:37 - it's expected to generate $429 billion of revenue by globally by 2029. And as I'm saying, it's a very, very hotly contested market. And I was thinking about two things that have happened recently. One of them, the competitors moving. So for instance, in the uk, over the first three months of the year, Disney, discounted its subscription to,
00:10:08 - And so Disney during that first quarter was actually able to outperform Netflix. And then, on a, on the other side of the world, in the United States, ESPN, which is actually owned by Disney, which is a massive global streaming service, has announced a partnership in February, 2024 with Fox and with, discovery, they're gonna create a new app and the, they have, the, the rights
00:10:42 - so NFL, the football, NBA, the basketball, baseball and hockey. And they're also going to stream NASCAR Racing Plus, they're going to stream the FIFA World Cup and the next FIFA World Cup is coming up in 2026. So I identify the moves of competitors as being a major challenge for Netflix. And in addition to that, there's a demographic trend,
00:11:12 - And, and it's actually a challenge for all streaming services, and that is that Gen Z and millennials actually don't watch linear tv and their attendance at traditional films is actually quite small as well. They prefer, user generated content such as, short clips that are available on YouTube or TikTok. they are very interested in streaming music on and,
00:11:45 - And, they're also very keen on, gaming. So one of the big challenges for Netflix and For the other streaming companies is going to attract in the fir in the first place that, that, cohort that generation of people and then retain those people because to date they've sort of relied on older generations of people, baby boomers and Gen X. And once those people die, they're going to have
00:12:17 - to capture that younger cohort. So that's one of their big challenges going forward. And I actually predict that there will be, some mergers and acquisitions within the industry space, because particularly in first world markets, I mean, they've almost, Netflix is in the United States has almost reached saturation point, and so they're gonna need to move into emerging markets, and they've faced challenges around that.

Challenges Ahead for Netflix in Vietnam

00:13:06 - where Thena Vietnamese government is challenging, their rollout of gaming within that country. So there are, it's a very evolving, very dynamic industry and there are lots of challenges in, in the future for Netflix. So yes, I would recommend anyone interested in it to keep studying it.

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