Netflix: cheaper content and more subscribers won’t make up for disappointing forecasts

For Netflix, growth may come at the cost of prestige.

The streaming service is under pressure to expand its subscriber base while keeping costs down. Adding a cheaper $6.99 per month advertising subscription tier and stepping up efforts to crack down on password sharing should be doing the trick.

But these are not the sort of moves that endear a company to its customers or drive the zeitgeist and win Oscars. Nor is shutting a mail-order DVD business whose revenue halved last year.

Netflix is always first to start the tech earnings season, often setting the tone for consumer-facing companies. This time last year, it announced its first subscriber drop in a decade, triggering a sharp fall in the share price. This year looks steadier, though margins and revenue forecasts remain underwhelming.

In the first quarter, the company added 1.75mn net subscribers. It helps that rivals such as Disney have been forced to accept that expensive streaming content requires higher subscription prices. HBO Max just provided an own goal by naming its streaming service Max, dropping the only part of its name that is associated with popular shows.

Still, revenue up less than 4 per cent for the first three months of the year does not befit a growth stock, even if it is better than the sub 2 per cent growth reported at the end of last year. Netflix is asking investors to be patient and wait for the third quarter to see the impact of change, while tempting them with promises of higher free cash flow and share repurchases to come.

It is putting in serious efforts to cut costs. Total streaming content obligations, ie what Netflix plans to spend on content, have fallen from a high point of more than $23bn in 2021 to $21.5bn. Continuing to make multi-episode dating shows such as Love is Blind instead of expensive films may not win the company glitzy awards but it will drive those numbers down even further.