Why a recession could derail Netflix’s growth plans

Netflix (NFLX -1.36%) has had a bumpy 2022. The company reported a drop in the number of subscribers for the fiscal first quarter, its first decrease in customers in more than a decade, and lost almost 1 million more in the second quarter. Netflix’s stock price has also fallen significantly, falling from a high of about $690 per share in November 2021 to around $225 at the end of July.

To meet its challenges, Netflix has outlined two key plans to revive growth. The first is a scheme to charge those who share their account logins with others a fee for the privilege of doing so. The second is to introduce an ad-supported plan that will be cheaper than existing levels. However, with many US economists predicting a recession before the year is out, Netflix’s strategy could soon run into trouble.

A person on a sofa with their small dog watching television.

Image source: Getty Images.

Netflix’s simplicity is both a strength and a weakness

For investors, Netflix is ​​a relatively straightforward prospect; The company operates an on-demand streaming service, offering a mix of original shows and movies, as well as content from third-party studios. And while the company has dabbled in the mobile gaming and movie industry, the majority of Netflix’s revenue still comes from its global subscriber base: around 220 million at the time of writing.

Netflix competitors Disney+, Amazon Prime Video and HBO Max are tied to parent companies that operate other businesses (theme parks, online retail, cable networks, etc.) and thus have more diverse revenue streams. Of course, it would be foolish to try to predict what would happen to any company in the face of the next economic downturn, but Netflix’s heavy reliance on subscribers means it can’t afford to lose the customers it does have.

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The risk of upsetting consumers

Netflix has announced two pilot schemes to determine the best way to charge subscribers who share their accounts. One test has been charging a small fee for such clients in Peru, Chile and Costa Rica, but the move has reportedly left some wondering what constitutes a home. A second trial, to be rolled out later this month in Guatemala, El Salvador, Honduras, Argentina and the Dominican Republic, will track smart TV usage. Accounts displayed on televisions in other locations will be subject to additional charges.

While both plans are still in the testing phase, Netflix has made it clear that it intends to implement a password sharer fee scheme in even more markets in 2023. However, it could be challenging for Netflix to introduce new fees. for consumers in the midst of a recession. Once again, subscribers are Netflix’s source of income. And while account sharing has been against Netflix rules for a long time, the crackdown may not sit well with many.

Ad sales could head south

Economic downturns are often predicted by a drop in consumer confidence. In turn, marketers often do the same, cutting ad spending, something Roku recently spotted in its second-quarter results. And of course, when a recession is in full swing, ad spend typically remains relatively low compared to more affluent times.

Netflix has earmarked an early 2023 release for its ad-supported tier, pitching it as a lower cost of entry for those who agree with the marketing messaging. But if Netflix finds that ad dollars are in short supply, then the company is likely to end up executing the plan at a loss. That might be fine in the short term, but if the recession continues for several quarters, as it did with the Great Recession between late 2007 and mid-2009, then Netflix could find itself pumping money into its cheapest plan for a while.

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Still, as things currently stand, the US is not officially in a recession, and Netflix’s plans are still actively moving forward. But if the economy follows the path many speculate it will, then the streamer’s growth strategy may need to be rethought if it doesn’t want to upset subscribers or have to subsidize its entry level for too long.

Tom Wilton has business dealings with Netflix, but has no financial position in any of the stocks mentioned. The Motley Fool has positions and recommends Netflix. The Motley Fool has a disclosure policy.

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