“It’s an orgasm of schadenfreude,” said an anonymous Hollywood executive to Matt Belloni of Puck News in reference to Netflix’s catastrophic collapse on the US stock market on April 19, 2022. In Hollywood, there was a celebration. The word schadenfreude, the glee engendered over someone’s misfortune, was tossed around in every article chronicling Netflix’s humiliation.
Shares of Netflix plunged 35%; it lost $50 billion of its market cap. After years of propping up the company on its free-spending ride regardless of its valuation, Wall Street reversed course and downgraded the stock. Not only did the company not meet subscription targets in the first quarter this year, they actually lost 200,000 subscribers for the first time in a decade, and expect to lose two million more in the next quarter.
It’s been an open secret that Netflix has lots of haters in establishment Hollywood. The upstart company upended the way Hollywood did business for decades, was rewarded handsomely by the stock market, and forced most of the legacy studios to change their business models and enter the streaming wars.
The word ‘arrogance’ has always been associated with Netflix. It lavishly outspends the studios in acquisitions and talent deals pricing them out of every deal. Here’s a recent example as reported in the New York Times: “Hollywood let out a collective gasp this month when it was announced that Netflix had spent about $465 million to buy two sequels to the quirky surprise 2019 hit “Knives Out.” Just a few years ago the streamer signed television creators Shonda Rhimes, Ryan Murphy, and Kenya Barris to nine-figure deals. Martin Scorsese’s The Irishman could only have been made at Netflix which ponied up a production budget of $225 million, exclusive of marketing costs.
Viewership data is a closely-held secret, not even shared with the content providers (What Netflix does reveal is how many viewers watched the first two minutes of a show – “long enough to indicate the choice was intentional” — according to a quarterly report from 2020). So while it’s common that heads roll at every studio for every flop movie, the Netflix admin is insulated from all accountability.
Another source of contention is the paying of enormous salaries to actors upfront with no profit-sharing backend, the way Hollywood had always done business, again upending traditional business practices that allowed for manageable budgets while sharing rewards with talent.
Netflix is also notorious for poaching employees away from other companies by doubling their salaries, then subjecting them to a controversial ‘keeper test’ to keep them employed.
And their awards campaign spending is so lavish that rivals are reluctantly forced to keep up (It was the two-year-old Apple+, a first-time entrant to the Oscar wars this year that grabbed the big prize, Best Picture for CODA, beating out the favourite, Netflix’s The Power of the Dog. The schadenfreude was palpable back then as well).
By 2017, it had more subscribers than cable TV did in the US. Netflix blazed a path that few could have foreseen, earning a prominent place in Hollywood.
Its own executives are extremely well-compensated. In a Securities and Exchange Commission (SEC) filing dated December 19, 2021, co-CEO Reed Hastings will earn $650,000 in salary and receive options worth $34 million in 2022. Co-CEO Ted Sarandos will earn $20 million in salary and get $20 million in stock options. According to Kim Masters of The Hollywood Reporter in “Netflix’s Big Wake-Up Call: The Power Clash Behind the Crash,” Bela Bajaria, head of global TV, makes a reported $16-$18 million a year.
Doubling down on the perception that Netflix was an industry leader, in 2019 it became a member of the Motion Picture Association, the trade association that thus far only had the six major studios as members. This is significant because one of the important mandates of the MPA is the theatrical release of its members’ films. Netflix’s strategy has always been to show its content on its platform; to comply with awards rules, it gives its contenders a theatrical release for a week or so before voting deadlines close. So its membership in the MPA is an acknowledgement that the current business model is outdated, influencing the legacy studios to reevaluate theatrical windows, an issue reinforced by Covid cinema closures.
While Covid-19 prevailed, Netflix thrived, along with the other streamers, with all the stay-at-homers seeking online entertainment. But with the advent of vaccines and quarantines lifted, people stopped watching and went out, while Netflix continued on its annual $17 billion free-spending way. The 100 million households that shared their subscription passwords was another source of revenue that Netflix never went after, nor did it veer from its strategy of dropping all episodes of a series at once, thereby missing an opportunity to keep subscribers hooked week after week. And having a lower-priced ad-supported membership tier was never considered.
Meanwhile, deep-pocketed rivals like Apple TV+, Amazon Prime, Disney+, HBO Max and Peacock all made inroads into Netflix subscriptions. Apple TV+ has its consumer electronics business to shore it up; Amazon Prime has its huge web server business; Disney+, HBO Max, and Peacock all have their studio businesses behind them with their massive IP and other diverse businesses like theme parks and television studios.
But it is to Netflix’s credit that this tech company was such a disruptor to an entrenched industry so resistant to change. It took merely two decades for it to go from a mail-order DVD business to becoming an established movie and TV studio. It has 221 million subscribers globally on a platform it invented from nothing. And it had the forethought to make licensing deals with studios to show their content on its platform, years before anyone thought of entering that space and building a rival streamer. Then it forced Hollywood to reevaluate its analog business and pivot to establishing streaming platforms.
Unlike the major studios which have valuable IP, Netflix had to start from scratch. In 2013, it bet big on the show House of Cards which proved to be a critical and audience hit. That was the turning point for its growth as it became known as a welcoming place for talent that wanted to make original content for a global audience. By 2017, it had more subscribers than cable TV did in the US. Netflix blazed a path that few could have foreseen, earning a prominent place in Hollywood.
So what’s ahead for the company to bail itself out? It has already hiked its prices in North America to $15.49 a month, the most expensive streaming service of all (In India, though, it was forced to lower its subscription price last December – its cheapest tier is Rs. 149 per month for one device – as it tried to attract more subscribers. Unlike Amazon Prime which offers shopping, music and Kindle deals in addition to licensing Bollywood hits, and Disney+/Hotstar offering sports rights, HBO content and bundled deals with Telecom companies, Netflix offers no extras even though it has spent about $3 billion on local content).
There are other ways it has become more cost-conscious. A test program to crack down on password sharing in Latin America will be rolled out globally over a year. It has started a foray into video games. It has laid off a lot of employees from its Tudum fan site, and cancelled some shows in development, including Meghan Markle’s animated project Pearl. While a few reality shows on the streamer do drop weekly episodes, it is likely that that strategy will extend to other shows as well, including, presumably, the newly announced Squid Game: The Challenge. And it has finally conceded that an ad-supported tier will be coming in a year or two. It’s even possible that Netflix could syndicate its shows to other platforms to extend their longevity, something it has resisted so far to keep its exclusivity.
“We make decisions based on the best information we have at the time,” Sarandos told the New York Times in May. “They are not always going to be right, but how you help navigate the outcomes, and the urgency you bring to it, is what gets folks through the storm. And the storms will come.” He added, “How much time do you spend licking your wounds? Let’s have that burned into our memory, but we’ve got to move on and move fast.”