Netflix's subscriber growth has slowed dramatically. Blame competition and the pandemic

·5 min read

Netflix's subscriber growth slowed dramatically in the second quarter as the surge in streaming subscriptions from the COVID-19 pandemic petered out, competition increased and the company considered novel ways to grow its business.

The Los Gatos, Calif., streaming giant added a mere 1.5 million paying members globally in the second quarter, which is down 85% from the same period last year, when it reported 10.1 million subscriber additions.

The company also added 61% fewer subscribers than it did in the first quarter, when it missed projections with 3.98 million new accounts. In the U.S. and Canada, Netflix lost about 430,000 paid memberships in the second quarter.

Although down significantly, the results were better than the 1.15 million subscribers Wall Street analysts had expected, according to FactSet.

Pandemic restrictions drove millions of people to sign up for Netflix subscriptions to binge-watch their way through the public health crisis, resulting in record numbers for the company.

But with in-person entertainment options open once again, analysts expect people will spend less time with Netflix than earlier in the pandemic. Restrictions also delayed the production of movies and TV shows that typically fuel Netflix's growth.

Meanwhile, competition in the so-called streaming wars has heated up with the growth of streaming platforms including Disney+ and WarnerMedia's HBO Max, which are trying to attract users and filmmaking talent. Netflix downplayed the effect of rivalries, citing Nielsen research saying that streaming represents just 27% of U.S. TV screen time, giving the company plenty of room to grow.

However, analysts said the competition has put some pressure on Netflix as it tries to defend its position as the biggest streaming company, now with more than 209 million paying members.

"Competition in the U.S. seems to finally have arrived in meaningful form given the backdrop of so many new streaming apps and the Discovery and Warner Media merger, as Netflix has actually lost subscribers in the U.S. and Canada region for the first time in many quarters," Joe McCormack, senior analyst at investment research firm Third Bridge in New York, said in an email.

Netflix forecast the third quarter would bring in 3.5 million subscribers. Shares declined slightly in after-hours trading, after closing Tuesday down $1.23, or 0.2%, at $531.05.

Netflix’s revenue rose 19% in the quarter to $7.34 billion, compared with a year earlier. Net income was $1.35 billion, compared with $720 million a year earlier. Analysts had expected revenue of $7.32 billion. Netflix's earnings of $2.97 a share were worse than the $3.16 analysts projected.

With subscription growth slowing, streaming services are trying to grow by spending billions on exclusive movies and TV shows to draw viewers and get them so hooked they don't cancel.

The company is spending big on content to shore up its position in the increasingly crowded field of streaming video as competitors including Disney+, Hulu and HBO Max try to take market share. Netflix has said it plans to spend $17 billion on content this year.

Although detractors say the company's fire-hose strategy of producing content prioritizes quantity over quality, the service has created plenty of buzzy shows that have garnered critical acclaim.

Netflix scored 129 Emmy nominations for its shows, including best drama series nominees "Bridgerton" and "The Crown," along with nods for "Cobra Kai," "Emily in Paris" and "The Kominsky Method." Netflix was barely topped by WarnerMedia's combined 130 nominations for HBO and HBO Max.

Netflix must rely more on original content as rival entertainment companies bring more of their shows and movies back home to put on their own streaming services. Popular series such as "Friends" and "The Office" once were big draws for Netflix. Not anymore.

Co-Chief Executive Ted Sarandos said in an interview broadcast on YouTube that the company copes with the loss of popular licensed studio programming by creating exciting originals.

"We go through that, we believe, by making these early investments in original programming and getting our consumers and our members much more attuned to the expectation that we’re going to create their next favorite show, not that we’re going to be the place where you can get anything every time," Sarandos said.

Among the top films on Netflix during the quarter were Zack Snyder's "Army of the Dead," the Kevin Hart-starring dramedy "Fatherhood" and the family comedy "The Mitchells vs. the Machines," which Netflix said was the company's most-watched original animated movie to date.

Last month, Netflix signed a multiyear deal for Steven Spielberg's Amblin Partners to supply the streamer with multiple new feature films a year. The deal was notable in part because the relationship between Netflix and the Oscar winner was at one time strained.

Spielberg had in 2019 intended to propose rule changes at an Academy of Motion Picture Arts and Sciences board of governors meeting that would have required films to play in theaters exclusively for at least a month to qualify for the best picture Academy Award category. The changes never occurred.

Netflix has moved to diversify its business, as well, with its move into gaming, which the company confirmed in its earnings report. It recently hired Oculus and Electronic Arts veteran Mike Verdu to lead its efforts in gaming. The strategy, Netflix said, builds on earlier efforts in interactive entertainment, including the choose-your-own-adventure "Black Mirror: Bandersnatch" and "Stranger Things" games.

"We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV," Netflix said in its quarterly letter to shareholders. "Games will be included in members’ Netflix subscription at no additional cost similar to films and series."

The company in June launched an e-commerce website that sells Netflix merchandise and products based on and inspired by shows including "The Witcher" and "Lupin."

This story originally appeared in Los Angeles Times.

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