An iconic company hits a speed bump

Netflix is tanking. Or rather, its stock price is—which is a rather different thing. What should we make of this?

Netflix is one of the iconic companies of this epoch, a trailblazer and game-changer. It upended traditional video, moving people away from linear television and movie theatres. It has been on a seemingly unstoppable spend-and-grow spree for many years. I have personally admired its achievements on this page and elsewhere, many a time. But now its stock is down nearly 70 per cent since the beginning of the year, and the naysayers are ringing the panic bells.

Subscriber growth has not only hit a hard plateau, it actually went into reverse for the first time in the company’s latest earnings statement—something that sent investors into a tizzy. The stock lost 35 per cent of its value in a single day, which is an eye-popping development.

So what’s going on? First, simple market saturation. Those who love Netflix and are willing to pay for it in mature markets are all signed up. There are 222 million paying subscribers, but growing that figure any more is easier said than done. Those in emerging markets are harder to enrol at current price points.

Second, the pandemic boom is over. Netflix, like Zoom and many others, clearly benefited from so many people in the world staying home through much of the COVID-19 scourge. Its market value ballooned by nearly 200 per cent in 2020 and 2021. That unexpected surge is now behind them, and a more sober reality is kicking in.

Third, a gentleman named Vladimir Putin decided to invade his neighbour, Ukraine. This has not only led to Netflix losing a bunch of subscribers from that part of the world, it has created rampant inflation in many Netflix-loving countries. Many subscribers are therefore rationalizing their entertainment consumption and abandoning some streaming channels.

Lastly, old-fashioned competition. Netflix’s vision gave it a flying start in the streaming game, but the big boys are firmly in the market now. Amazon, Disney, HBO, Apple and many others are investing big money in their own shows and movies, and offer very credible alternatives. YouTube and TikTok have free platforms that dominate the lower end of the market, in any case.

Netflix is caught in a pincer: if its revenues don’t stop flatlining, it will not be able to make the massive investments in content and talent that it has become used to; but if the array of offerings on the platform shows noticeable decline, subscribers will be even harder to acquire. What is it to do? It is looking first to protect its top line by cracking down on password sharing, and by experimenting with a cheaper ad-supported tier. 

Analysts have joined investors in becoming suddenly gloomy about the streaming giant. But retrospective wisdom is the norm in the punditry game. To me, Netflix has just a hit pause moment: it’s time to reflect. The big party is over; a reset is needed. Netflix can no longer blow big money on big names; expensive content must earn its keep. Smart investment is now the name of the game.

Never forget that what this company achieved was far bigger than a rocketing stock price. It launched a bold move into video streaming, far ahead of all others. It removed customer frictions in ways others couldn’t even imagine—how many people have you had to call to instal Netflix in your house in a far-flung land, or to complain about the experience? And it has been just as bold in believing in human talent and in crafting a very distinctive culture—albeit a rather brutalist one.

Those lessons—in strategy, customer experience, and talent attraction—have set a standard for all of us. These are smart people. They may have hit an unexpected speed bump at high velocity, but they will recover and find a slower, safer path ahead. That’s as it should be. Successful companies often fall prey to hype in market sentiment, and start growing far too quickly. Netflix, too, was beginning to sound arrogant as it roared on. Now, a calmer, more measured approach is needed. 

The essential ingredients are still the same: stand out in your product positioning; protect the customer experience; excel through the efforts of great people enjoined in a great culture. Add a dose of humility to that mix, and a more sustainable trajectory could await Netflix.

Perhaps the greater learning for all of us is what I call the lesson of impermanence in my new book, Up & Ahead. Success doesn’t last; there is a natural entropy in business, just as in life. Surprises and disruptions eventually unseat us all. What we do with the twists and turns is what defines long-lived success. Let’s see where Netflix goes with this, and what happens next.

(Sunday Nation, 8 May 2022)

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