Netflix Shouldn’t Take a Victory Lap Just Yet | Tech News

Netflix Shouldn’t Take a Victory Lap Just Yet

Netflix' subscriber losses were not as severe as expected in the second quarter, but investors need to look at the fine print.

| Updated on: Jul 21 2022, 00:28 IST
Netflix reported a significantly smaller loss of 970,000 subscribers.  (REUTERS)

Netflix Inc. has shown an uncanny ability in the past to bounce back from an unexpectedly poor showing in one quarter with a better-than-projected result the next time around. And so it was on Tuesday: After alarming the market with its estimate in April of a drop of 2 million subscribers for the second quarter, the video streaming giant reported a significantly smaller loss of 970,000 subscribers. Investors celebrated, pushing up Netflix shares as high as $225 in after-hours trading after they rose 5.6% during the regular session to $201.63. After the hammering Netflix stock has taken in recent months, it was almost as if all was forgiven.

Well, hold on a second. If you look at Netflix's subscriber numbers regionally, things don't look so healthy. The only area where Netflix showed any real growth was Asia Pacific, where it has a smaller presence than elsewhere. In its two biggest regions, North America and Europe, the Middle East and Africa, Netflix's subscriber losses increased meaningfully.

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In North America, for instance, Netflix lost 1.3 million subscribers, about double the loss of the first quarter. Ditto EMEA.

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It's never good to be shrinking in your biggest and richest markets. But the North American losses in particular reinforce the idea that Netflix blundered by raising prices as competition from the likes of Walt Disney Co., Apple Inc. and Warner Bros. Discovery Inc. was increasing. That idea gained currency after the first-quarter results. Netflix disagrees: Its executives have disputed the idea that price increases increased churn, although it was hard to take them seriously before and harder now. (They doubled down on that view on Tuesday, stating in their quarterly shareholder letter that “retention improved over the course of the quarter” and churn was “now back near pre-price change levels” even though it “remains slightly elevated.”)

To be sure, Netflix executives can also point to the financial benefit of the price increases: Average revenue per membership in North America rose 7% in the second quarter from the first to $15.95, which means that revenue in the region rose slightly from the first quarter despite the smaller subscriber base.

But increasing revenue off a diminishing number of customers is not a long-term recipe for growth. It is, in fact, how the cable TV industry has been operating for a while, which is hardly an industry Netflix wants to emulate. Netflix has projected a return to overall growth in the third quarter. Whether it can stem the losses in its biggest markets is a more fundamental issue.

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First Published Date: 21 Jul, 00:28 IST