Has Netflix Peaked? It's... Complicated

The most popular streaming service in the world under scrutiny again - with good reason this time

Having ridden the wave of the pandemic in 2020, Netflix now is again in slow growth waters - so its prospects seem to be in question… again. Are they really, though? (Image: Thibault Penin, Unsplash)

Few questions have been asked during the last three or four years in the streaming services space more than this story's headline: it had become such a recurring theme for analysts to question Netflix's growth after every investor call or every missed forecast, that one could practically pre-post the same article as last quarter's, wait for the latest figures, make a few changes and come off as extremely concerned of Netflix's future in the exact same way for the umpteenth time. Then the COVID-19 pandemic hit, circumstances changed and so have the analysts' approach: now Netflix suddenly had a lot of new subscribers, sure, but why did Disney Plus have more?

That Reed Hastings guy does not seem to catch a break, does he?

Truth be told, though, Netflix does have a growth problem and yes, Netflix does look like it is peaking. But those two statements have been valid for some time. Has the most popular streaming service in the world actually peaked as we enter Q2 of 2021? If it has, would it still be a sustainable business if it had to rely on its current user base? If it hasn't, is there room enough to grow so as to become a sustainable business?

Netflix has posted minimal growth for the last two quarters, despite the ongoing pandemic, for a reason: in the US practically everyone who wanted to subscribe, either already had or did in 2020. There's very little room for growth there. Most new subscribers came from other countries and this will continue to be the case for the foreseeable future - but Netflix will have to seriously invest in overseas markets with local content and extensive localization in order to keep those subscriptions coming.

Netflix retains the advantage of the first mover in the streaming services industry but that will probably not be enough to protect it from the likes of Disney in the long run. (Image: Thibault Penin, Unsplash)

For the time being Netflix has the advantage in those markets as its main competitors either aren't commercially available there or aren't as popular... yet. Availability will change in 2021 and 2022, though, while popularity is rather risky to depend on with "service hopping" (leaving one streaming service for another) being so easy these days. Netflix will have to not only bring as many new subscribers to the fold as possible but also make sure that it loses as few as possible to other services. Easier said than done, that.

All analysts and journalists going on and on about how Netflix built this streaming thing singlehandedly but now faces serious competition that was not there before... well, they are right. Disney, Warner, AT&T, Amazon or Hulu (Apple and NBC Universal have failed so far to threaten anyone) are all looking to gain market share and there are only so many subscription services each household can keep paying for. In other words: Netflix had the streaming pie all to itself once, but now is forced to share it with others, hoping that the pie will keep getting bigger lest its own pieces become smaller.

Netflix is the "default" streaming service right now because of brand and momentum, yes. Its vast user base is a shield of sorts. But Disney has had an amazing ride during its first 15 months, Warner will be releasing all of its 2021 movies on its own service, AT&T's HBO Max is formidable and Hulu may belong to Disney but has a loyal following. Consumers now have options that may be more to their liking, "service hopping" is easy and, frankly, many could be feeling that they've had enough Netflix during the past few years and may be looking for a change. This would not help the "default" service at all.

Shows like The Queen’s Gambit are the exception rather than the rule in Netflix’s library: rarely ever do the company’s exclusive productions break into the mainstream pop culture that successfully. (Image: Netflix)

If Netflix was to be life-coached right now, it would hear that instead of worrying about things it can't control, like the competition, it should focus on the things it can, like its own content. Thing is, not only should the Americans do that, they absolutely need to: there's a strong sense that Netflix does not produce enough quality content to keep old subscribers around. Quantity? Sure, lots of new movies and TV shows every month. Great variety too. But there are very few noteworthy productions among them, making that "Netflix and chill" proposition much harder than it should be. For every The Queen's Gambit or Ozark or Mindhunter or Extraction or Mank or Roma, there are dozens of forgettable shows and films many of which may never be watched by a lot of people.

This is a problem that even new subscribers realize soon enough - but they have an extensive library of great movies and TV shows from years prior to go through before they start wandering around Netflix's categories looking for something interesting to watch. Thankfully Netflix seems to have realized this at some point, hence the star power - and great expense - of forthcoming productions it will be bringing to its library in the next 12-24 months. Still, the Americans will need a lot more time in order to offer a quality library as deep as Hollywood studios have built over several decades.

One path left unexplored by Netflix, for the time being, is the one leading to more subscriptions through password-sharing blocking. Research companies put the percentage of consumers who use friends' or relatives' Netflix credentials anywhere between 25% and 35% of the total active users of the service. This means that for every three or four subscribers there is one "freeloader" who is watching Netflix content without paying for it.

Netflix has permitted account sharing between consumers not of the same household for more than a decade, but that policy may change sooner rather than later. (Image: Alexander Shatov, Unsplash)

Up until now, Netflix has given "freeloaders" a free pass - but that could soon change if the company's recent tests on account sharing blocking are any indication. If the company implements security measures against logins attempted by anyone other than the actual owner of a Netflix account, there'll be a backlash to deal with. The percentage of "freeloaders" that will choose to get their own subscription - after the dust settles - won't be anywhere near the 50 million consumers a conservative 25% of Netflix's current user base amounts to. But it will amount to several million and the Americans will have to decide how many millions of new subscribers are worth an ugly PR situation like this one.

Long story short - and to answer this story's opening questions - all evidence points to the obvious: no, Netflix has not peaked yet. Yes, there is still room for growth in international markets. Yes, there are a few million consumers - freeloaders now, reluctant subscribers in the future - that can probably be added to its user base if the company decides to impose password sharing restrictions. And yes, there are just enough new Netflix TV shows or movies planned for the next 12-18 months to give current subscribers reason to stay.

But analysts - no matter how lazily they often seem to handle reporting on Netflix's future prospects - are right about one thing: the company does not have the luxury of not growing its user base, even in low single digits, globally every year. At the very least there will surely be some subscribers leaving for competing services or because of inevitable price increases - so those will have to be offset by new subscribers.

It may seem like belonging to those companies that are “too big to fail” now, but Netflix will face a number of new challenges in the years ahead and the outcome is very much still undecided. (Image: Jonh-Mark Smith, Pexels)

It is the overall Netflix business model, though, that is not easily sustainable if it keeps funding Hollywood-level productions against almost flat revenue streams. One would think that, say, around 225-230 million subscribers by 2024 could be a user base large enough to pull that off - especially now that the company has stopped borrowing vast amounts of money - but competition from the likes of Disney and Warner will force Netflix to go for more sensational content and/or more expensive intellectual property licensing.

In a sense, Netflix peaking at some point is not a matter of "if" but "when": no business can keep growing indefinitely, so the Americans will have to come up with new ways of making the most out of the content they produce sooner or later. This means change. Consumers hate change. It will be interesting to see, then, how will Netflix go about striking a balance between what's tolerable and what's necessary. Just like any other business now, no?