Netflix’s leadership team looked shaken. The blistering 10-year growth streak that had made it a Wall Street darling came to an abrupt end in the spring of 2022 with the revelation that it was losing hundreds of thousands of subscribers.
The streaming wars were at fever pitch, with Disney+ and other services launched by the established Hollywood studios all gunning for Netflix. Speaking to stunned investors on a video call on April 19 2022, Netflix co-founder Reed Hastings began rattling off initiatives to reverse the slide.
Netflix would start cracking down on customers who shared their passwords with friends or relatives, an idea he had opposed in the past. Another proposal that Hastings had long dismissed – advertising – was now on the cards.
To some viewers, it seemed like Hastings was throwing spaghetti at the wall in the hope that some of it stuck. The stock plummeted, marking the start of what became known as “the Great Netflix Correction”.
But instead of being the comeuppance that many in Hollywood’s old guard had been praying for, it marked the beginning of a strategic shift that has expanded Netflix’s lead over the traditional entertainment companies, which are still struggling to make money in the business after pouring billions into streaming.
Since launching its password crackdown in May 2023, Netflix has added 45 million paying subscribers. Its share price has risen more than 300 per cent from its post-correction low, recently setting new all-time highs.
Such a rebound was hardly assured in 2022. But since then, Netflix has launched an ads business from scratch, invested in its nascent video games division and expanded its live “experiences” around popular shows such as Bridgerton, Squid Game and Stranger Things. It has even started dipping into live sport.
“It’s just been incredible execution,” says Jessica Reif Ehrlich, a veteran media analyst at Bank of America.
She notes that the new initiatives were all started while Netflix was navigating a major management change. Hastings retired as chief executive in 2023 and was replaced by a protege, Greg Peters, who shares the role with Ted Sarandos. “This must be the smoothest transition of any management team ever,” Ehrlich adds. “There hasn’t been even a blip.”
While Netflix regained much of its swagger, the traditional Hollywood groups have been mired in a funk. The Netflix correction marked the end of investor patience for streaming losses, and Disney is the only one of the legacy entertainment groups currently making any money in that business after turning profitable this summer.
The movie industry is weathering another difficult year, prompting concerns about whether the box office will ever sell as many tickets as it did before the pandemic. Cable television – once a prodigious cash flow generator – is in a deep decline, and many doubt that streaming will ever replace its moneymaking power.
Taken together, these pressures contributed to Shari Redstone’s decision this summer to sell Paramount, a company her family controlled for decades. Around the same time, BofA analyst Ehrlich took the unusual step of publicly imploring Warner Bros Discovery’s management to explore strategic options, declaring that its “current composition as a public company is not working”.
These problems have washed over Hollywood’s creative community in the form of job cuts and reduced production budgets, while the rebound that many had hoped for after last year’s strikes by actors and screenwriters has not materialised.
A long-time TV writer and producer confirms the grim mood. “There is not a writer in this town who thinks their career is going well,” he says. “Everybody is up against it right now because the jobs are just not there.”
Meanwhile, Netflix’s soft power is rising in Hollywood. Sarandos is chair of the Academy Museum of Motion Pictures, and oversaw Netflix’s recent $70 million (€62 million) renovation of the historic Grauman’s Egyptian Theatre on Hollywood Boulevard. His wife, Nicole Avant, is a long-time friend of Democratic presidential nominee Kamala Harris. In an old-school flex, Netflix even purchased all the billboards along the Strip on Sunset Boulevard.
But some in Hollywood are angry at the company for radically changing the economics of the entertainment business. Some voting members of the Academy remain aggrieved that Netflix does not give its Oscar-contending films a wide release, preferring limited screenings in select theatres for only the minimum time required to qualify for an Academy Award.
“The disdain for Netflix is beyond anything I’ve ever seen,” says a Hollywood veteran who has held top positions at major entertainment companies. “They have eliminated the back end financial [profit] participation of every artist in the world. They dominate and control everything, and no one’s even close.”
He adds: “The city is bleeding right now. Bleeding.”
Hastings may have sounded like he was riffing when he made his announcements about password sharing and selling advertising.
But in reality he and other senior managers had been discussing the ideas for years, current and former employees say. To get them up and running, Hastings turned to Peters, then the chief operating officer.
Like Hastings, Peters came from a tech background. His mother was a computer programmer at IBM who made sure he learnt to code at the same time he learnt to read and write. Before joining Netflix in 2008, he had worked for Tivo and Red Hat Network.
There was scepticism about the password crackdown as Peters began launching controlled tests in markets such as Chile, Costa Rica and Peru in early 2023. Some analysts thought the initiative would end up losing customers for Netflix.
Instead, it proved to be a boon that turbocharged Netflix’s growth for more than a year, with total subscribers reaching 277.6 million in the most recent quarter, up 16.5 per cent from a year earlier.
Nearly five years after the launch of Disney+ ignited the streaming wars, Netflix remains on top in terms of both subscribers and time spent on the service. In July, it captured about 8.4 per cent of US screen time while its nearest Hollywood rival, Disney, had 4.8 per cent between Disney+ and Hulu.
Streamers run by the other Hollywood studios – Warner Bros Discovery’s Max, Comcast’s Peacock and Paramount+ – all had less than 2 per cent of viewing hours.
Yet with the surge from the password-sharing crackdown starting to taper off, analysts are raising questions about the next leg of growth for Netflix. Its other big initiative – advertising – will take more time before it is a meaningful contributor to the bottom line.
Netflix partnered with Microsoft to use its “stack” – a system for delivering digital advertisements – and launched its ad-supported service in 12 countries by the autumn of 2022. It began publicly releasing a list of its top 10 shows, allowing advertisers to target the streamer’s most popular programmes.
But Amazon, which competes with Netflix with its Prime Video service, also entered the streaming advertising business, and in typically aggressive fashion began offering rates much lower than those Netflix was seeking.
In a move that shocked the industry the executive running the advertising business, Peter Naylor, left the company during this year’s annual “upfront” presentations. Soon after, Netflix said it would phase out its use of Microsoft’s “stack” and build an in-house advertising platform instead. The company now says that advertising will not be a “primary driver” of revenue growth until 2026.
Despite the setbacks, Ehrlich says she believes Netflix will be successful in the ad business once it is running at scale. One reason is the loyalty of Netflix’s audience. “They are like the old pay TV bundle, [where people watch] two hours a day, 60 hours a month,” she says. “So they can guarantee that they can reach consumers. The dollars follow the eyeballs.”
In Hollywood and on Wall Street, there is an expectation that weaker streamers will either combine or shut down within the next 18 to 24 months. Yet even if there is a shake-out, there will still be an intense fight for eyeballs in the broader streaming audience.
YouTube is mostly known for its user-generated content but is also pushing paid subscriptions for offerings such as NFL Sunday Ticket, which can cost about $480 per year.
TikTok is allowing its users to experiment with long-form video of up to an hour. And free streaming video sites such as Tubi, a service owned by Fox, are growing quickly on the back of older TV titles.
“Competition remains fierce not just within the category of subscription streaming, but also against the broader category as a whole,” analysts at MoffettNathanson, a research firm, wrote recently. “YouTube already accounts for over 20 per cent more TV usage than Netflix and is growing at a faster rate. Short form video is also here to stay.”
Before the Netflix correction, the company was known in Hollywood for paying well-known directors or showrunners huge sums to make movies or series.
This helped it win audiences early on with edgy programmes such as Orange is the New Black and House of Cards. Its content budget soared, bankrolled by investor enthusiasm for buying new shares in the then-loss-making company.
Now that they’re the dominant player ... they can take advantage of their market share
To the fury of the Hollywood establishment, Netflix rejected the studios’ system of profit participation, known as back end, whereby directors and actors take a smaller amount of money upfront in exchange for a cut of the gross revenue if a movie is a box office success.
But it handsomely rewarded top directors such as Martin Scorsese for his three-hour mafia epic The Irishman, or showrunners such as Shonda Rhimes for bodice-ripping period drama Bridgerton and Ryan Murphy for serial killer anthology Dahmer.
The lavish spending appears to have topped out, at least for now. “Now that they’re the dominant player, they don’t have to pay people extra to be in business with them, right?” says the long-time producer and writer. “Now they can take advantage of their market share.”
After the subscriber declines in 2022, Netflix capped its content budget at $17 billion, though spending fell to $13 billion during the Hollywood strikes last year. The company also discovered that its subscriptions kept growing during the strikes, even without much fresh programming.
“They still had incredibly strong subscriber growth and they were not suffering when it came to their engagement numbers – they were still doing fine while the traditional TV businesses were really struggling,” says Jamie Lumley, an analyst at Third Bridge, a research firm.
The pressures of the strike also prompted legacy media groups to resume licensing their shows to Netflix, which they had stopped after they launched their own streaming services. Old shows were revived by the “Netflix effect” – most notably Suits, starring Meghan Markle, which became the most streamed programme of 2023.
The lesson Netflix took away from the strike experience, Lumley adds, is that it does not have to produce as much new programming as it had been. “That gives them flexibility to take some bigger swings on different kinds of content,” he says. Company officials say they will increase content spending from $17 billion in the future, but haven’t given a time frame.
It has become known for popular lower-cost fare like its “unscripted” programming, mainly reality shows such as Love is Blind, Selling Sunset and Is It Cake?, and experiments with live streaming, which debuted with a glitchy standup routine by comedian Chris Rock in March. Analysts see live streaming as a gateway to real-time professional sporting events and other programming that could increase audience engagement.
Netflix’s live-event capability will face its biggest test yet on Christmas Day, when it will stream an NFL game. The move has prompted speculation that it may seek to join Amazon and Apple in the race for sports rights, though Sarandos insists he is not interested in paying for full-season rights in which most of the financial benefit goes to the other partner.
Perhaps the most interesting move by Sarandos since the Netflix correction has been a $5 billion, 10-year deal with World Wrestling Entertainment’s weekly Raw programme in the US. It is the group’s biggest foray into streaming live events, and could form a framework for Netflix if it ever enters into a deal with a professional sporting league.
“Wrestling historically has a very engaged fan base, and this is weekly content,” Lumley says. This kind of recurring programming means Netflix does not have as much pressure to “keep their foot on the gas in the traditional production engine”, he adds.
But for some, the wrestling deal indicates a shift from the higher-brow offerings of the early days. “If someone is defining quality as being sophisticated, literary scripted programming, then Netflix is not specialising in that the way they were a few years ago,” says Robert Thompson, professor at the Newhouse School at Syracuse University.
“What wrestling does, what live stand-up comedy does, has value in itself. It’s just different from a sophisticated, scripted show.”
For all the gripes about programming quality, Netflix still came out of last weekend’s Emmy awards with 24 winners, including four for Baby Reindeer – though it was beaten into second place overall by Disney’s production unit FX, creator of hit series such as Shogun and The Bear.
The ultimate prize in Hollywood, the Oscar for Best Picture, has eluded Netflix despite multimillion-dollar marketing campaigns for its eight nominated films since 2019, which include Roma, The Power of the Dog and All Quiet on the Western Front.
Whether it will continue aggressively pursuing prestige films became a live topic in Hollywood this year after the departure of Scott Stuber, who led the company’s film division and actively recruited top filmmakers to make Oscar-worthy movies during his seven-year tenure.
Addressing speculation that his successor, Danny Lin, might veer from Stuber’s strategy, Sarandos said there was “an unlimited appetite to make better films, always”. The company points to Emilia Pérez, this year’s winner at Cannes, and an adaptation of August Wilson’s The Piano Lesson as proof of its commitment to sophisticated films.
Best Picture award or no, and despite the threat from free streaming, Netflix has for now cemented its position at the top of a wounded Hollywood.
“Every decade has a dominant media company,” says a senior executive at a Hollywood rival. “And Netflix is it for this decade.” Copyright The Financial Times Limited 2024
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