Netflix lost 200,000 subscribers in the first quarter of 2022. Shares take a deep dive.
Netflix added 7,400,000 subscribers in Q4 2022. Shares bounce back.
Within a single year, Netflix has seen its fortunes fall and rise again. What led to the decline of Netflix, and how it recovered? What is the road ahead? We will uncover all this through the lens of product and growth.
😵 Why Netflix lost its users?
Some of the few possible reasons for the decline in users:
- Netflix increased its monthly subscription price in January 2022, which led to many cancellations.
- Netflix faced more competition from other streaming services, such as Disney Plus, Hulu, and Apple TV Plus12.
- Netflix had weaker content slate in the first half of 2022, due to production delays caused by the Covid-19 pandemic.
- Netflix cracked down on password sharing, affecting millions of households using the service without paying.
- Netflix suspended its service in Russia after the country’s invasion of Ukraine, which resulted in a loss of around 700,000 subscribers.
This news led to a severe crash in the share prices - from a high of $700, it crashed to $200.
Another thing to remember is that before Q1 2022, Netflix’s key metrics were hours watched and retention. All the product decisions were optimized for the same. Every new product feature that was introduced was measured based on these factors only - with retention being the key metric and hours watched being the leading metric.
🕵 Netflix’s product strategy - an outsider’s view
A key product strategy at Netflix is GLEe - Get big, Lead and Expand (as explained by ex-VP of Product at Netflix, Gibson Biddle). Every bet in the GLEe framework is a hypothesis where the team forms a long-term product vision. These bets are usually 3-5 years long.
For example, when Netflix started streaming alongside its DVD rental business, its library size was just 300 movies. Still, the vision was to become the best streaming service - and all product decisions were around that. When Reed Hastings asked Gibson, what would be their key differentiator - the team came up with ‘Personalization’ as the answer. Right from the thumbnail to the order of the shows you see, everything is personalized. Netflix obsessively tracks data on what you see, when you pause and at what point you abandon a show.
With the severe subscriber loss and the other issues, Netflix had to recalibrate their strategy.
♟️Netflix’s key shifts in 2022
The first alignment they made was to recalibrate their metrics. They were obsessed with subscriber growth earlier, so they were fine with password sharing. Now the key focus was on revenue. With a revenue-focused mindset, they made key changes:
- Lower pricing tier with ads: Traditionally, Netflix stayed away from advertisements. But with pressure on growth, they have started to roll out ad tiers in countries with lower pricing.
- Password sharing clampdown: An additional price per person is charged for additional members to access Netflix content. (This is rolled out in a few countries.)
From a product perspective, here are a few implications:
- If a person of a house is travelling outside the home and accessing Netflix, how to ensure that they can access the content seamlessly? How to transfer the viewing history of a shared member to their own account?
- When it comes to advertising, it doesn’t only matter how good the program is. For the advertiser, it is access to viewers at a particular time. How to balance the number of ads shown vs the quality of the user experience?
- Earlier shows were tracked using starters, watchers, and completers. Now with advertisements coming in, will shows be renewed or cancelled based on the revenue they bring from the advertisers?
🛣 The comeback and the road ahead
Along with the changes that Netflix implemented, another key factor for the turnaround was the content - new releases like the television series “Wednesday,” the docuseries “Harry and Meghan” as well as Rian Johnson’s film “Glass Onion” as popular content during the quarter.
Additionally, Netflix is placing a huge focus on games for the future. They tried interactive storytelling for kids and adults, but it wasn't successful enough for big investments. So, they moved to general gaming, starting with mobile games. Success in gaming will take years, so Netflix isn't presenting it as a quick growth strategy for 2023. Games are a long-term gamble and if it doesn’t work out - they will present their next big hypothesis.
Netflix leads the streaming industry as one of the few profitable platforms (in terms of operating income). Despite competitors like Disney facing operating losses, Netflix invested $17 billion in content creation in 2022. With ongoing high-quality content production, Netflix is poised to capture more market share in slower times.
Key Takeaways from Netflix story
Be flexible: Just like Netflix reevaluated their business strategies and embraced an ad-supported plan, don't get stuck to your hypothesis. Adapt to new information and changing conditions.
Focus on paying users: Rather than only increasing user numbers, Netflix prioritized revenue-generating customers for long-term success.
Don't panic in degrowth: It's crucial to remain calm and collected during periods of de-growth, as knee-jerk reactions can lead to poor decision-making.
Revisit your primary metric: Netflix changed its primary metric from retention to revenue when it made more sense for their business goals. Be open to changing your primary metric.
Work on long-term vision: Similar to Netflix's big bet on gaming, always have ambitious projects in the pipeline while optimizing your current offerings.
Tool of the Day
This website is a great collection of tools and frameworks that are extremely useful to a product manager. The resources are organized into sections like design, discovery, prioritization and strategy.
A great resource for anyone interested in product strategy.