Tuesday was the first time Netflix executives have talked publicly about their company and their plans since they shocked the media world in April when they said Netflix was suddenly losing subscribers.
The company shared new data with investors via its Q2 earnings report: specifically, that it lost 1 million subscribers in the second quarter of the year, which is not good but better than the 2 million losses it had earlier predicted. But more importantly, it was a big moment for Netflix to answer some very important questions: Has it figured out how to make more hit shows and movies? Something it badly needs. Will making it harder to "share" Netflix passwords help the company's bottom line? Has Netflix found a way to add ads to a service that has always defined itself as anti-ad? And the most burning question: Does Netflix have a Netflix problem — or does the entire streaming business have a problem?
Here's what we learned on Tuesday.
Content
For a long time, Netflix made Hollywood look easy: It showed up with zero experience making movies and TV shows, threw a little tech and a lot of money at the problem, and immediately succeeded: Think House of Cards or Orange Is the New Black.
Over time, critics and competitors sniped that Netflix was making too much stuff and that a lot of it wasn't that great. In response, Netflix could point to its growth numbers: It didn't matter if you didn't like its Adam Sandler movies or reality shows or salacious true crime stories. Netflix's audience loved that stuff, and that's why its numbers kept increasing.
But now that's not true. And in recent months Netflix executives have been publicly acknowledging that maybe it's making a little too much stuff, after all: "We're reducing volume," Netflix movie boss Scott Stuber told the New York Times this week. "We're trying to be more thoughtful."
Another sign that the company is going to be (relatively) choosier about what it greenlights: It will stop increasing its overall content budget every year. During the company's earnings call, co-CEO Ted Sarandos said the $17 billion Netflix is spending this year is "around the right zip code" for the next few years as well.
In the near term, that means a lot of projects Netflix had been developing are now floating around Hollywood, looking for a new home. But we won't know for a while whether New Netflix has improved at making stuff people like because it takes time to make stuff: usually a year or more for TV shows and even longer for movies.
Meanwhile, Netflix is in the middle of a rollout for The Gray Man, a $200 million Ryan Gosling movie it greenlit years ago, with the express intention of creating an Action Blockbuster That Creates a New Franchise, like James Bond or Jason Bourne. I saw a screening last week for superfans of the Russo brothers, the team that made the movie (and, not coincidentally, many of Disney's most successful Marvel films), and that audience's response felt … muted. Rotten Tomatoes, the review aggregator Netflix has touted in the past, has the movie rated at an underwhelming 52 percent.
But if you're looking for the company to tell you that it's been going about it the wrong way for years, you wouldn't find any evidence of it yesterday. In its investor letter, the company insisted that its popular shows are still really popular — citing Twitter activity to make its case. And it said its strategy of releasing all episodes for its shows at once still made sense — even though it has already modified that approach for some of its highest-profile shows, like Ozark and Stranger Things, which it released in a couple of drops instead of one.
(By the way, Netflix continues to insist, both publicly and privately, that it's still interested in building out its video games — an effort that has puzzled people in both the gaming and video businesses. More to come on that …)
Password sharing
This one is pretty simple: Netflix used to be very chill about multiple people using a single account. Now it's not. It says it thinks there are more than 100 million households using a Netflix account without paying for it, and it's trying to figure out how to nudge them to become paying customers. It's already started experimenting with a couple of options in Latin America.
Advertising
Netflix's disclosure that it was losing subscribers last spring was jarring. But the thing that truly underscored how much trouble Netflix was in came when founder Reed Hastings semi-announced plans to roll out an ad-supported version of the service. That's because Hastings has always insisted that Netflix was successful, in part, because it didn't have ads; his U-turn announcement, made somewhat haphazardly during its April earnings call, contributed to the idea that Netflix was blindsided by its audience problem and was scrambling for answers.
For Netflix's streaming competitors, almost all of which already sold ads or are planning to, Netflix's concession is a great toldja moment: They've always insisted that lots of people have no problem with ads, as long as it means they're paying less for content (or getting it for free). And you can certainly see the logic to a Netflix ad tier that costs less than an ad-free one — in theory, it lets Netflix appeal to customers who can't or don't want to pay $15.50 per month.
But Netflix's sprint to get something up and running really fast — it hasn't built any ad tech or services itself, and it's relying on Microsoft and a team it has yet to hire to get started — suggests that Netflix hasn't really thought all of this through. The really knotty problems that come with ads — keeping both advertisers and customers happy at the same time, for instance, or trying to keep lots of ad-free customers from migrating to the cheaper service — will be ones that Netflix will have to figure out on the fly.
For now, Netflix is just saying that it's going to start rolling out an ad tier sometime early next year — earlier this year, it told employees it was aiming for the end of 2022 — and that it would get better over time. "Our advertising business in a few years will likely look quite different than what it looks like on day one," the company wrote in its earnings letter, while promising to deliver something better than what exists today on conventional TV and other streaming services. Eventually.
All of which was enough to make investors mildly more interested in Netflix than they were a day earlier; the company's shares went up more than 7 percent after the news. But it's not anything like the glory days not so long ago — as in the beginning of the year, when Netflix was worth $600 a share. Its stock is still down two-thirds, at $200 a share.
The reality is that Netflix, Wall Street, and all the media companies that have emulated Netflix by launching their own streaming services still don't know the answer to the most pressing question: Is Netflix running into trouble because of Netflix-specific problems? Or is the world of people willing to pay for streaming services much smaller than everyone thought just a few months ago?
We're not going to know the answer to that one for a long time.
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And for something not completely different: Last month, I wrote about data that suggested Netflix was having a hard time hanging on to its newest subscribers, and I asked readers if they were canceling Netflix, and why. That story seemed to generate a lot of response, some of which suggests that it traveled beyond the sphere of folks who normally pay attention to what I have to say about media and tech and entertainment. In any case, thanks for reading and writing. Here's a sampling of the feedback.
"I sign up for Netflix when it has something worth watching. Then I look around at what they have and nothing else interests me ... usually too graphic or apocalyptic. Modern stuff is mostly too violent or horrifying for me. Besides, there's stuff on other streaming services to watch, and I'm not paying for all of them. So I drift around from service to service."
"Even though Netflix spends a ton of money on new programming, I find most of it is trash. Thanks to our children, we have access to other streaming services so we are not reliant on Netflix alone."
"I signed up for Netflix to binge watch Squid Game, then unsubscribed after the first month. It was comparable to paying for a ticket to a 24-hour movie festival at a theater. I'll probably do the same for season two of SG."
"We haven't left yet, but we have been discussing it, and the reason is because Netflix introduces new shows and hypes them up and then cancels them after two to three seasons with absolutely no closure at all for the viewer. … We just don't have time to watch enough TV to justify paying for seven different streaming apps. We have to choose the ones we watch the most."
"While I occasionally view other streaming services, if I could only choose one, it would definitely be Netflix."
"We canceled because Netflix just kept raising their prices without offering us anything more or better. We started at $7/month. Once it hit $20, we thought, 'Is this worth it? We only watch a couple hours of TV a week...'"
"You missed one big factor, which is that many of the Un-woke are despising the down-the-throat leftist, LGBTQ, Obama-loving, and other uninteresting [content]."
"I'm hanging onto Netflix. Barely. My current calculus is, 'If I can get one quality movie per month (the Pratt, Hemsworth blockbuster types) and one show or doc, AND I have the catalog to scroll through in a 'there's never anything on' moment, I'll continue to be a Netflix customer. I think I will definitely go for the ad tier."
