On the menu today: How did Netflix, the company that more or less invented the modern streaming service, suddenly lose 200,000 subscribers when it expected to gain 2.5 million new subscribers? Meanwhile, Biden cabinet officials finally visit President Zelensky in Ukraine; and asking why the Chinese government did not prioritize vaccinating the elderly against Covid-19.
What’s Happening with Netflix?
This newsletter doesn’t often dip its toe into business news, but every once in a while, something in the business world occurs that it so fascinating and eye-catching that it requires us to sit up and take notice.
The company that more or less invented the streaming service, Netflix, just tripped over a rock and landed hard — announcing it had lost 200,000 subscribers in the first quarter of 2022, when the company expected to increase 2.5 million subscribers for that period — and is now forecasting a loss of 2 million paid subscribers around the globe for the second quarter.
You usually have to look at the Biden administration’s economic projections to find a miss that big.
Netflix’s first, and most consequential, explanation is that, “suspension of its service in Russia and the winding-down of all Russian paid memberships resulted in a loss of 700,000 subscribers. Excluding that impact, the company said it would have seen 500,000 net additions during the most recent quarter.”
In some ways, Netflix was one of the companies that benefitted the most from the pandemic lockdowns, and with the pandemic ending, their programming now must compete with “real life.” Back in 2017, Netflix CEO and cofounder Reed Hastings boasted that, “You get a show or a movie you’re really dying to watch, and you end up staying up late at night, so we actually compete with sleep . . . and we’re winning!”
Maybe the world is catching up on that lost sleep. More likely, Americans are now free to travel, gather in groups, throw parties, attend sports events and conferences, and enjoy life in-person again instead of vicariously through a screen. Audiences are returning to movie theaters in fits and starts. We’re collectively spending less time sitting on our couches this year, and that’s a good thing, even if it’s not good news for Netflix.
I don’t have many friendly acquaintances in Hollywood, but one of them told me this weekend that a big problem Netflix faces is that the company’s decision-making is driven almost entirely by algorithms. As the Netflix Technology Blog laid out December 2020:
Executives throughout the entertainment industry have always consulted historical data to help characterize the potential audience of a title using comparable titles, if they exist. Two key questions in this endeavor are:
- Which existing titles are comparable and in what ways?
- What audience size can we expect and in which regions?
Machine learning and statistical modeling can aid creative decision makers in tackling these questions at a global scale. The key advantage of these techniques is twofold. First, they draw on a much wider range of historical titles (spanning global as well as niche audiences). Second, they leverage each historical title more effectively by isolating the components (e.g., thematic elements) that are relevant for the title in question.
How would you like to be a screenwriter or producer who gets told, “All of us flesh-and-blood humans love your show idea, but the algorithm says it won’t work”?
Obviously, this algorithmic approach generates its own share of hits and misses for Netflix. It doesn’t take a genius or a particularly complicated algorithm to determine that an action-comedy in which Ryan Reynolds does Ryan Reynolds things, Dwayne Johnson does Dwayne Johnson things, and Gal Gadot does Gal Gadot things is likely to be popular. But running show-creation proposals through an algorithm probably ensures you’ll get shows and movies that are like shows and movies that were hits in the past — not necessarily new creations that are bold, unusual, or surprising.
Then again, Netflix brought Squid Game to American audiences, and it’s hard to believe that a dark, bloody, heartfelt, socially satirical Korean-language action series looked like a safe bet. Maybe that algorithm can spot diamonds in the rough, after all.
But as my friendly acquaintance observed, in the old network-television days, sometimes a network head would fall in love with a show even if the test audiences didn’t get it and roll the dice on an unusual proposal. And we’ve all seen great shows that started with a subpar pilot or even a rough first few episodes, as the creative team and cast get the feel for the characters. The old human-taste-driven process of show and movie approval was probably more subjective and unpredictable, but it at least it left the door open a crack to something dramatically new and different from what had come before.
I had another theory that my friendly acquaintance concurred could be a minor factor in Netflix’s troubles.
Your mileage may vary, but from where I sit, Stranger Things is fantastic — probably the best show Netflix offers. (As another indicator of Hollywood’s collective difficulties in spotting a concept that will be a hit: Stranger Things creators Matt and Ross Duffer “were rejected 15 to 20 times by various networks, while other execs had balked at the idea that the show featured four kids as lead characters but that it wasn’t TV for children.”) As noted in the discussions of CNN+, Stranger Things is the kind of show that makes a customer more easily justify the decision to pay for a subscription — it’s unique (or at least it was when it debuted), it cultivated a passionate fan base, and it isn’t available anywhere else.
And the production process behind Stranger Things’ fourth season has been . . . well, severely challenged. The first season was released in July 2016, the second season was released in October 2017, and the third season was released to serious acclaim — okay, Daniel Payne didn’t like it as much as the previous seasons — on July 4, 2019. Fans had grown accustomed to a new season every 15 to 20 months. The first “teaser” trailer for season four came out way back in . . . February 2020.
And then the Covid-19 pandemic hit, halting production; filming didn’t resume until September 2020. Once it was safe to resume filming, the cast and crew faced a gargantuan amount of work; the Duffer brothers’ plans for season four were considerably larger than previous seasons: “nine scripts, eight hundred pages, almost two years of filming, thousands of visual effects shots, and a runtime nearly twice the length of any previous season.” The first half of season four will finally arrive on May 27.
The result is a gap of nearly three years between seasons, and I figure Netflix’s not having a new season of its flagship show for that long of a stretch can’t be helping its subscriber numbers. Also, Thursday’s Wall Street Journal offered an eye-popping figure suggesting that the show’s budget had exploded: “Under-the-radar, relatively low-cost hits are necessary to balance out the costs for big-ticket programming such as the special-effects-filled show “Stranger Things,” whose new season has a per-episode cost of $30 million, according to people close to the show.” For perspective, HBO’s Game of Thrones was costing $15 million per episode by the end of its run. No doubt inflation and perhaps even labor shortages and supply-chain problems are factors, but that’s just a gargantuan sum.
Diffidently, as if embarrassed to cite it, [former Disney CEO] Bob Iger pointed to competitors who don’t need to make money from streaming. “There is no question that deep-pocketed technology companies, Apple being a great example, Amazon being another. . . . I don’t want to suggest their [streaming affiliates] are loss-leader businesses, but they are in those businesses for other reasons.”
Mr. Iger’s Disney is itself a diversified entertainment conglomerate, with many ways of making money that Netflix lacks, from its theme parks and merchandising to its ad-supported cable, streaming and broadcast TV networks.
In other words, Apple TV+, Amazon Prime, Hulu, and Disney+ are all parts of much larger companies that make money outside of subscriptions to their streaming service. Paramount+ is part of Paramount Global, which is the new name of ViacomCBS, which owns more than 170 television networks broadcasting in more than 100 countries. HBOMax is part of the new mega-conglomerate Warner Brothers Discovery.
Netflix, which doesn’t run advertising, makes money on subscription fees, and it still has that DVD-rental service, which made $200 million in 2020 — half what it made in 2018. Disney can withstand a lousy quarter or two for Disney+ if its theatrical releases, theme parks, and merchandise are selling well. For Netflix, subscribers are what keep the company going.
Oh, and you don’t have to look far on social media to find people interpreting a drop in subscribers in the first quarter of 2022 as a backlash to Netflix’s decision in to release Cuties back in September 2020. As much as Netflix deserved a backlash to the simply atrocious decision-making in that film — as I wrote at the time, “In order to make a movie that denounces the cultural trend of sexualizing girls at an inappropriate age, they chose to film a scene that sexualizes girls at an inappropriate age” — it is very difficult to believe that people outraged about that film nearly two years ago just got around to canceling their subscriptions now.
ADDENDUM: In case you missed it, over the weekend, the Biden administration finally sent some cabinet members to Ukraine — long after a lot of European heads of state and high-ranking officials had already visited Zelensky in Kyiv — and I asked why the Chinese government didn’t prioritize vaccinating the elderly.