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Netflix - the company that disrupted and then made Blockbuster and virtually the entire video rental store industry obsolete while simultaneously virtually inventing the streaming business model - announced yesterday that in its first quarter it lost 200,000 subscribers and expects to lose another two million in Q2.

Variety writes that "this marks the first time Netflix has lost subscribers during a quarter in 10 years. Netflix said that not accounting for the losses in Russia, where the streamer cut services over the countries invasion of Ukraine, it would have added 500,000 subscribers in Q1.

"The streaming service previously forecast 2.5 million paid net adds in Q1, while Wall Street analysts expected Netflix to add 2.8 million new subscribers worldwide in the first quarter vs. 3.98 million in the year-earlier period, according to FactSet. So the expectation it would perform poorly compared to previous quarters was a given — the fact it actually lost subs is quite shocking. Netflix cites both increased competition and password-sharing, which the streamer is looking to monetize, as drivers of this subscriber loss."

Variety goes on:  "Co-CEO Reed Hastings said Netflix is currently exploring launching lower-cost, ad-supported streaming plan options, something the streaming mogul has long been against. Hastings also pointed to how cracking down on password sharing will help Netflix bring in subscribers it technically already has as users: 'They love the service, we’ve just got to get paid'."

KC's View:

I do think that there are some lesson in here for retailers, who, while they compete in a different sphere than Netflix, face some of the same issues.

Let's start with Hastings' assertion that people love the service but just aren't paying for it, and that Netflix has to expand on current tests to find ways to enforce limitations on password sharing.  The payment issues somehow remind me of the Bed Bath & Beyond conundrum, in which the retailer's promotional activities were so connected to coupons - just like a lot of other retailers - that people wouldn't even go into the store without one.  It became about price, not value … which is a dangerous place to be, because it defines the game in a way that always can be subverted and disrupted.  That's something every retailer has to avoid - price is important, but if it becomes the only differentiator, the retailer has to realize that there is an inherent vulnerability.  There has to be something else.

Which is not to minimize the importance of price, especially in a time of inflation and, if you believe some of the economists' predictions, a real risk of recession in the not too distant future.

Netflix's new willingness to accept the idea that there ought to be a new pricing tier - lower, but including advertising - that can bring in a new subscriber base makes a lot of sense.  It recognizes reality, and goes someplace that other other streaming services are embracing.

Here's how The Information characterized the shift:  "Hell has frozen over. Netflix co-CEO Reed Hastings’ revelation tonight that he is willing to introduce a lower-priced tier of service supported by commercials is a ground-shaking strategic shift for the video-streaming pioneer. In the past he had resolutely opposed adding advertising, even as most Netflix rivals had done so. But Hastings is nothing if not a realist."

In his New York Times analysis, Andrew Ross Sorkin notes that "Disney+ will begin offering an ad-supported subscription, for a reduced fee, this year.  HBO Max began showing ads on its service last summer and said it had not lost premium subscriptions to the ad-supported alternative.  Amazon doubled down on its free, advertising-supported streaming service last week, renaming it Freevee, from IMDb TV, and expanding its programming budget.  Other streamers, like Hulu, Paramount+ and Peacock, have been offering ad-supported services for a while."

Again, a lesson for retailers, even for those of the upscale variety.  We may be entering a period of extended price sensitivity, and so it will be important, even as you raise prices to reflect your own costs, to find ways to give consumers a win every once in a while.  Be transparent about higher costs and the need to pass them on, but do so in a way that positions the retailer as an advocate for the shopper, not a sales agent for the supplier community.

I think there's another lesson for retailers in the Netflix story.  Let me quote, for a moment, from the coverage by New York magazine's "Intelligencer" column:

"Netflix was supposed to be the antidote to the bloated world of cable television. Remember back when you had those low gray boxes on your console? You’d click through hundreds of channels, spending a fraction of a second glancing at one low-budget show after another, and feel — after all that — that there was nothing on TV.

"Of course, there was plenty to watch, but the problem was none of it was good. So when the pandemic hit, things were very good for Netflix, just as things were good for all kinds of businesses that ask you to do nothing more than sit on your ass. But now Netflix is an expensive, swollen monster of a company that’s not very different from its competitors. Why pay $20 a month for a premium subscription when you’re not even sure if that new show you want to watch is Apple+, or Disney+, or Hulu?"

Damning words, so much so that they demand repeating:

"Netflix is an expensive, swollen monster of a company that’s not very different from its competitors."

Let's drill down on what I think are the most important seven words in that sentence:

"… that’s not very different from its competitors."


The question I would ask is, how many retailers out there, if they were really honest with themselves, would have to concede that those seven words also describe their businesses?

Meaning … most of the products you sell, and most of the services you offer, are virtually the same as offered by all their competitors.  Meaning … if a customer were blindfolded and placed in the middle of your store,  he or she would have no sense of where they were if the blindfold was removed.

I'm a longtime Netflix customer.  I abandoned Blockbuster for its DVD-by-mail business almost as soon as it was offered, and I enthusiastically embraced streaming when the model shifted.  But if I am honest about it, I've been largely disappointed by the content available on Netflix.  I find that even its original productions tend to have big stars and big budgets, but somehow they almost always seem to need one more draft of the screenplay.  There are exceptions, of course, but I must admit that I spend more time watching Amazon Prime Video, Apple TV+, Paramount+, Hulu, etc…. Netflix hasn't quite become irrelevant, but its differential advantage strikes me as diminished.

Netflix says it plans to maintain its plan to spend $18 billion on original content this year, but I think that maybe the company should re-evaluate how it invests in content.  In my view, too much of it is focused on lowest common denominator programming … which ends up being largely undifferentiated.

Again, a lesson for retailers.