Don't Look Away

Why is Netflix doing so badly?

The ending of Netflix’s Don’t Look Up (2021)

Netflix’s stock price took a pummeling today, going down as much as 25% after the company announced it had lost 200,000 subscribers in the first quarter of 2022 - compared to its projected 2.5 million new users for the same period. This also marks the first time in a decade Netflix has lost subscribers. The company cited specific, temporary factors such as their pullout from Russia (which alone costed it 700,000 users) and other streaming services’ stock prices has decreased as well. However, even considering both, Netflix in particukar seems to be doing especially badly. Why?

The business model of a streaming service is simple yet mind baffling. Let’s just merge together TV shows and movies as “media”. Users can pay for each item of media they want - just like owning a DVD (or a VHS tape, for the olds out there). Problem is, this model never worked for music - which is why, when downloadable music became a thing, music industry revenue tanked, and continued declining for basically all of the 2000s. The reason why the industry didn’t go out of business ended up being mostly unexpected - Spotify. The streaming service, and others like it, helped pull music revenue out of the gutter by offering a simple business model: pay a flat(ish) fee every month to consume as much music as you want.

Normally economists model [perefences] as functions, but to all purposes they're basically a number figure anyone would be willing to pay for a given thing. If people have a different willingness to pay for something, then you can charge different amounts for it. The difference between how much anyone is willing to pay and what they actually pay is called the consumer surplus: if you'd pay 20 dollars and get something for just 15, your surplus is 5. It can be positive, zero, or even negative (think someone paying for price gouged insulin).

The economic concept behind this is simple enough: bundling. Imagine there are two types of consumers who want two different things - for example, more or less comfortable seats in movie theaters. If you offered the “expensive” one to everyone, consumers with lower willingness to pay wouldn’t attend; if you offered the “cheap” one only, discerning buyers would take their business elsewhere. Bundling is fairly similar to price discrimination, which I’ve previously covered, so you can read up on that if this interests you.

The key about bundles is that they have to be priced just right: if buying the expensive bundle is too expensive, people on the fence will pay less. If the cheap bundle is too expensive, people will just not pay any price for it. These two conditions are crucial: you have to both provide a service that people want to pay for in general, and a service that people want to pay the right amount for specifically.

The applications for streaming are obvious. Most apps have a trial period, a cheaper version with crappier stuff (Netflix), or a free version (Spotify, YouTube). People who get the trial version (or the other two) simply do not want to pay for the whole thing - and the apps are betting on them not wanting (or not remembering) to leave once they get in. Obviously the content itself is a bundle, and the most common ones are obviously all or nothing - except in the Disney/Hulu/Star package, where you can pay separately for streaming services that have (in broad strokes) “stuff for kids”, “movies for grownups”, “tv shows for grownups” (Hulu is also not available outside the United States and its shows are in a weird streaming limbo).

In general, having the most content and/or the content users want to watch most gets you ahead in the streaming game. So companies don’t just compete on price, they also compete on quality and quantity, plus for specific users - Paramount Plus, HBO Max, and Disney might not want to attract the same viewers.

So what is Netflix’s problem? Basically everything. Netflix uses three different bundles sorted by video quality, basically, but they used to be sorted by amount of viewers allowed - which they got rid of because it proved to be a pain, since users were constantly getting logged out after changing devices. While this does make sense from a theoretical perspective, it’s not really clear that people care all that much about video quality - and Netflix raised prices much more than other platforms (it costs as much as the Disney/Star package in Argentina, for example).

But its biggest problem is, simply, that nobody wants to pay for their product. They don’t have many flagship shows, besides the rare hit like Squid Game, and their model centered on binge-watching (i.e. uploading whole shows at once, rather than once a week) means that users only really need to be subsrcibed for one week whenever their favorite show drops. Compare the public profile of HBO’s Euphoria, which was literally inescapable on social media for two whole months, with that of Sex Education - a show virtually identical in subject matter, tone, and genre.

Netflix has the brand recognition, public profile, and infrastructure (their app is far superior to most others) to succeed - the problem is that it doesn’t have a lot of content people actually want to watch, and it doesn’t space that content out enough. A while back it was mentioned that the most watched show on it was Friends, strikingly consistently - people are just not finding new things on the platform. Once upon a time, Netflix was the only game in town, so it had all the content; now, it barely has any, while everyone and their mom has a streaming app.

Because the market for streaming apps is so saturated, customers have to choose between different packages of content - and they’ll prefer to pay either the same for more or less for the same. If Netflix charges more for less, it’s obviously gonna end up losing out. Therefore, the fact that the company claims that a third of its userbase (100 out of 222 million users) are password sharers isn’t the cause, but rather a consequence, of the problem - people just don’t think a Netflix subscription is worth paying for.

Not being an expert on business practices, or tech, or anything, I can’t really make a “recommendation” for Netflix, because there are large tradeoffs attached. Their glances at advertisement and monetizing password sharing might prove savvy, cutting edge moves, or they will tarnish their brand and damage their reputation even further. But, truth be told, what’s happening to them could be happening to everyone else. While Disney has its colossal trove of IP to keep creating content for (the upcoming Kenobi movie, the Ashoka tv show, etc) and Amazon bought the rights to properties like Lord of the Rings and Fallout, Netflix is currently facing a future where all its flagship shows are over (except, perhaps, their rumored Bioshock show).

The fundamental problem, it seems, is that there are too many apps and nobody wants to pay for them all - eventually, the issue will be settled by the bigger fish eating the smaller. This might seem bad, especially with all the hype antitrust is getting lately, but i wouldn’t argue so - there are basically two main ways market concentration can increase while still benefitting everyone. The first is that, even while two firms merge, their market share remains small, which results in a price increase but that ends up benefitting other firms more than the “mergees”. Besides from this not being a good scenario, it’s also clear that fewer streaming services is the endpoint, so eventually this stops holding (imagine a world where Disney+ holds half the streaming libraries and Amazon Prime the other half). The other scenario is where, for whatever reason, the new, bigger firm can charge lower prices for the same product. I think this is fairly likely - if Amazon bought Netflix and cannibalized its content, a Prime subscription would cost the same while being worth more. But it’s also plausibld they continue charging the same price for various siloed off apps like Disney is doing. So who knows.