Netflix’s subscriber loss is actually good news

Netflix has just lost almost a million subscribers. But the surprising result has led to a surge in its stock price.

Netflix has reported shock financial results for its most recent quarter.

All eyes were on the important measure of the streaming company’s subscriber loss, which numbered almost one million.

While that seems like a horrendous result when compared to the previous quarter’s churn of 200,000 members which led to a sell-off of Netflix stock, the loss of 970,000 accounts is actually good news.

That’s because it’s significantly lower than the 2.4 million subscribers Netflix had projected it would lose – and after a bruising three months, it’s exactly the turnaround the streaming service needed.

The better-than-expected news led to an inversion of its previously declining fortunes. Netflix stock gained 5.61 per cent to $US201.63 ($A291.29) by the market close and a further 7.85 per cent in after-hours trading. It has rarely nudged above $US200 in the past three months.

It’s the opposite of what happened after the previous quarter, where its stock crashed 25 per cent, wiping $US54 billion off its value. Netflix’s stock price has lost two-thirds of its value since the start of the year.

Netflix’s results and improved market outlook also spread to other companies in the sector – Disney’s price went up, as did American streaming company Roku.

Netflix co-chief executive and co-founder Reed Hastings conceded the usual circumstances. He said: “It’s tough losing one million subscribers and calling it a success.”

The streaming giant had a particularly good quarter in the Asia Pacific, the regional umbrella under which Australia falls. In APAC, Netflix added 1.1 million paid subscribers and grew its revenue 23 per cent year-on-year, compared to global revenue growth of 9 per cent. It revealed its average revenue per membership increased in Australia.

Stranger Things S4 is Netflix’s most watched English-language series.

Today’s news is welcome respite for the under-siege business, which has been riding a wave of bad press for months, intensifying since its previous quarterly results.

In the past three months, Netflix has reduced its operating costs by sacking hundreds from its workforce, revealing today those moves amounted to $US70 million in severance costs. It also wrote down $US80 million of value from its books, due to real estate.

In its shareholder letter, the streamer claimed it now has a better understanding of the market challenges – account sharing, competition, macro-economic pressures – which led to its disastrous previous quarter.

It said: “First and foremost, we need to continue to improve all aspects of Netflix. This focus on improving our core service has served us well over the past 25 years, and remains our north star to drive continuous growth.

“It’s why we strive for an ever better content, marketing and product experience.”

Netflix fired a shot at its competitors by emphasising it was a “pure-play streaming business” that was “unencumbered by legacy revenue streams”.

Netflix specifically said it wasn’t beholden to “extended or exclusive theatrical windows” and that it could let subscribers “binge watch TV if they want, without having to wait for a new episode to drop each week”.

While it didn’t name its competitors, those examples probably refer to the likes of Disney (which primarily releases its streaming series such as Obi-Wan or Ms Marvel on a weekly basis), and HBO Max and Paramount+ (Paramount released Top Gun: Maverick, which has a longer theatrical window than the studio’s typical 45-day lockout period).

Those statements indicate Netflix feels the pressure to differentiate itself in a saturated market as it’s challenged for its once emphatically dominant position.

A recent success for the streaming giant has been the series Lincoln Lawyer, starring Manuel Garcia-Rulfo and based on the book by Michael Connelly.

Its bright spots included the fourth season of Stranger Things, which clocked up 1.3 billion hours of viewing, which is its most watched season of English-language TV. Overall, it’s second only to Squid Game. It also named The Umbrella Academy, Heartstopper, Lincoln Lawyer, Hustle and The Ultimatum as recent successes.

In its non-English language programming, Netflix called out Colombian series The Marked Heart and French film The Takedown.

It projected it would balance this quarter’s subscriber loss by adding one million accounts in the three months to September 30.

The streamer revealed more details of its upcoming introduction of a cheaper advertising-supported membership tier, which is now slated to launch in early 2023 and only initially in a handful of territories.

The company said it expected that the new offering would take time to grow sign-ups and ad revenue. “Over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues),” the company said.

Basketball drama Hustle stars Juancho Hernangomez and Adam Sandler. Picture: Scott Yamano/Netflix

Netflix last week announced Microsoft would be its global technology and sale partner for its ad-supported tier.

Netflix also gave an update on its crackdown on password sharing. It said it was “encouraged” by the early results out of multiple territories in Latin America where it is trialling a way to charge the 100 million customers who share their passwords beyond their residential household.

It’s testing two different formats, one which allows subscribers to “add a member” while a new test run will roll out in Argentina, Dominican Republic, El Salvador, Guatemala and Honduras from next month where customers can “add a home”.

In a blog post, Netflix said it was “working hard” to figure out how to best charge for password sharing. It promised it won’t change anything in other countries until “we better understand what’s easiest for our members”.

The crackdown will begin in 2023.

Originally published as Netflix’s subscriber loss is actually good news