Editor’s note: In part one of this two-part series, we look at what went wrong with Netflix’s global numbers. Part two—coming tomorrow, barring a big breaking story—will dive into how India played a key role.

Netflix’s sad story: the basic deets

The dire numbers: The company co-CEO Reed Hastings announced that the platform has lost 200,000 subscribers in the last quarter—when it was projected to add 2.5 million instead. And expects to lose another two million in this one. Its shares immediately crashed by 39%—and some analysts are convinced it will lose another 50% in value. 

The reason: Netflix has been throwing billions of dollars on content. And while its revenue has barely kept pace, its subscriber count kept growing. That investor story has been shattered: “In the past, we saw a strong relationship between content spend and subscriber growth. So, the spend seemed worth it. As of Tuesday’s earnings release, we’re seeing that relationship break down.”

Netflix’s explanation: Hastings blamed the negative growth on the following factors:

• It lost 700,000 subscribers due to the Ukraine invasion and subsequent sanctions on Russia.
• Password sharing is the other culprit—with its 222 million paying households sharing their accounts with another 100 million households.
• Increased competition in the US from Peacock, HBO Max, Apple TV+, Discovery+, and Paramount+.

Netflix’s cure: is fairly straight-forward. Cut back on its current $17-billion-a-year spend on content. Crack down on password sharing. And finally, introduce a cheaper ad-driven model over the coming year. The aim: To make revenue and viewership the key metrics of growth—as opposed to subscriber counts.

So what went wrong with Netflix?

Here’s a quick round up of the popular theories of what went wrong—and almost all of them focus on its US market/English language content:

One: Most of the popular content on Netflix was not original—like ‘Friends’ etc. And it has not created enough must-subscribe shows and movies to take its place: “For every single title on the Netflix catalogue, the demand is pretty much flat. The catalogue for HBO Max and Disney+ is growing double digits.” Increased competition has laid bare a core flaw in its strategy:

“Netflix until now seems to have believed the best way to produce them is to throw all the money it can find at Hollywood and wait for the successes to start rolling in… But as [author Matthew] Ball presciently pointed out in his 2020 analysis, ‘If all it took was spending more on top talent, the video business would just be about who spends more.’”

Quote to note: Co-CEO Ted Sarandos is suddenly reminding investors that Netflix is new to the entertainment game: ‘We’ve been doing this for a decade. That’s about 90 years less time than all of our competitors have been at it.” At one time, Netflix was proud to be an outsider—a tech company disrupting the old-fashioned Hollywood model. Now, not so much.

Two: The sheer amount Netflix spends on content—projected to be $19 billion this year—ratchets up the pressure to produce mega-hits: “the number of home runs Netflix is hitting simply isn’t enough, not given the massive number of at-bats the company takes every year.” Or as Sarandos puts it: “We have to have an ‘Adam Project’ and a ‘Bridgerton’ every month and to make sure that that’s the expectation of the service constantly.”

Three: This in turn means that Netflix operates like a Darwinian jungle. Netflix is entirely data-driven—and therefore very cancel-happy. The math balances the number of viewers with how much it will cost to renew a show—which becomes more expensive with each passing season. As a result, it throws a lot of shows at subscribers—but is quick to cancel them if they don't deliver huge results within the first two seasons:

“They have to give [a show] more money per series, and if they decide to recommission it, it becomes more expensive for them to make. Because of that, so many more shows are cancelled after two series because it costs them more.”

It also focuses on ‘completers’ who watch all of a show in the first 28 days—as a primary metric of success. There is little room on Netflix for slow-burners or series that are decently successful like ‘The Babysitters Club.’

Four: Netflix has long been singularly focused on adding new subscribers. So it keeps churning out huge amounts of new content to attract new eyeballs—dropping an average of 100 original titles a quarter. But unless there is a super-hit like ‘Squid Game’, there is little incentive to sign up. And if it keeps cancelling your favourite shows, there is less reason to remain a subscriber—more so if the most talked about series/movies are on other platforms: 

“Consumers are growing warier of rising prices for streaming services and becoming more likely to cancel a service when a favourite show comes to an end… According to Deloitte, 25% of US customers have cancelled a streaming service only to resubscribe to it within a year.”

Key observation to note: As Vulture points out, Netflix truly believed that people would stay loyal to the platform not the actual content on it:

“The inference was that while, yes, Netflix is powered by great programming, it had become so beloved by subscribers, the platform itself was more important than any individual title. One industry vet who’s worked in both streaming and linear says Netflix tried to create a world where ‘entertainment is something you do’—open the Netflix app—‘as opposed to shows and movies you love and share with friends.’”

Five: If you’re throwing 100-plus new titles at your users every quarter, then you have to solve the problem of discovery. But the Netflix algorithm hasn’t always done a good job of figuring out what the users want. It divides viewers into over 2,000 so-called “taste communities”—and each person gets individual recommendations based on these allocations. But the priorities of the algorithm keep changing. Example: It may only recommend shows similar to those you binged on—if that’s Netflix’s metric of success:

“In functional terms, these algorithms mean everything on Netflix is essentially competing with everything else on the platform. It's quite possible that, at the time ‘The Baby Sitters Club’ season 2 came out, the algorithm simply had other priorities for the relevant taste communities. It prioritised something else, and as a result not enough people even realised ‘The Baby Sitters Club’ season 2 had ever released.”

Again, this leads to both stunting potential hits—and greater user frustration. It can take up to ten minutes to find something to watch on Netflix.

Point to note: In contrast, HBO Max has played up the role of human curation on its platform.

Six: Netflix is just the canary in the gold mine of streaming—and should be an alarm bell for its rivals. As everyone jumped into the game, platforms got into an arms race over content—each trying to outspend the other. US media groups are together expected to spend upwards of $100 billion on content this year:

“These sums are ‘historic [and] precedent-setting. These are the types of numbers more associated with the Department of Defense. From single companies like these it’s almost unimaginable—but the numbers are certainly unsustainable.’”

With Netflix’s growth stalling out, that lavishness is beginning to look unwise: “Fewer subscribers coupled with increased costs because of fiercer competition to create original content mean less profit for everyone.” And many investors are now convinced that streaming will never be as profitable as the old cable TV model. 

The bottomline: All this frantic analysis—focused entirely on English-language content and numbers—misses the elephant in the room. Netflix’s US market is already tapped out—a reality it has been reluctant to acknowledge in public. Its growth numbers are now driven by overseas markets—and India is the biggest prize among them. So this is just as much a story about Netflix’s epic fail in India. We explain why in the next instalment.

Reading list

New York Times and Financial Times (paywall) look at what Netflix’s numbers mean for the industry. MarketWatch explains why some investors think its stock is going to fall a lot more. Vulture, ScreenRant and The Verge look at flaws in its content strategy—including its algorithms. Stratechery makes a case for an ad-driven model—and explains why it will work for Netflix. LA Times has more on the clampdown of password sharing that is coming soon.