After a decade of rapid growth and a complete upheaval of Hollywood, Netflix hit the south wall. The streaming company announced Tuesday that it lost 200,000 subscribers in the first quarter, the first time it lost subscribers since 2011. Netflix also expects to lose another 2 million subscribers in the current second quarter, making it its the worst year since the company went public.
Investors, analysts and Hollywood executives are prepared for the company’s sluggish start this year, but Wall Street still expects Netflix to add 2.5 million subscribers. Netflix shares have fallen more than 40 percent this year, and after the report, it fell 24 percent to $265.11 in after-hours trading.
Netflix management pointed to four reasons, including the prevalence of account sharing and increased competition among peers. The company said that in addition to the 221.6 million paid subscribers, 100 million households use its services but do not pay. The company is experimenting with ways to get these viewers to sign up.
“if we count a large number of households with shared accounts, our relatively high household penetration rate, combined with competition, poses a resistance to our income growth,” management wrote in a letter to shareholders.
This result will affect all major entertainment companies. After seeing millions of subscribers abandon pay TV and switch to streaming, U.S. entertainment giants have merged and restructured to compete with Netflix in streaming. Investors encouraged this strategic shift, buying shares of companies such as Disney (131.9, 4.13, 3.23%) that are heavily engaged in streaming businesses.
Netflix had previously expected 2.5 million subscribers to grow in the first quarter, roughly in line with Wall Street’s expectations. For the current second quarter, analysts expect a 2.43 million increase in subscribers.
Outside the U.S., Netflix is still far ahead of most of its competitors and is the world’s largest streaming service. The company believes it can get out of its current predicament by rolling out better shows to attract new customers and find more ways to charge existing users. Whether Wall Street believes them remains to be seen.
Netflix’s first-quarter revenue rose 9.8 percent to $7.87 billion, down from analyst expectations. However, earnings per share of $3.53 were significantly higher than analysts’ expectations of $2.91.
Netflix expects revenue to rise 9.7 percent to $8.05 billion at $3 per share for the quarter. Wall Street forecasts are revenue of $8.23 billion and earnings per share of $3.02.