When inflation sends costs higher, consumers start thinking hard about what they're buying, and whether it's worth the expense. Items that seemed like "must-haves" when they were cheaper start looking a lot less important. Streaming services like Netflix (NFLX 0.98%) now risk ending up on the list of things that consumers can live without. And while the company's already facing tough challenges from increased competition, inflation could give Netflix an even harder battle.
Discretionary vs. staple goods
Netflix's current dilemma rests on the gap between the things people need and the things they simply want, which economists divide into two broad sectors.
The consumer staples sector contains companies that develop or distribute products necessary for surviving (e.g., food and beverages) or living (e.g., household and personal products). Even when they get selective in inflationary times, consumers will keep purchasing bread, lightbulbs, and toilet paper.
The consumer discretionary sector contains companies that develop or distribute products that are considered luxury items -- things no one needs to survive. These high-end companies can be found across industries -- just think home improvement, retail, and travel.
Some products or services once thought of as discretionary have become staples in the modern household. Lots of families now can't imagine living without at least one streaming video service. But when they're under pressure to make every dollar stretch as far as possible, some of those consumers will likely question whether streaming services are truly a "necessity."
Will consumers put Netflix on the chopping block?
Netflix hiked its streaming subscription prices in January 2022, while cracking down on password-sharing among its customers. With its new $10-$15 price range for most standard plans, Netflix is facing intense competition from rivals such as Disney+, Apple TV+, and Peacock (all priced below $10 per month) -- many of which offer their own buzzworthy shows.
Netflix is now priced on the high end of streaming video, competing with services with potentially even greater cultural cachet and name-recognition such as HBO Max. Netflix used to have broadly popular and familiar shows that people would watch and rewatch, especially television series such as The Office and Parks & Recreation. But it's now losing more and more of these shows to rivals, and, without such bread-and-butter offerings, the remaining steak-and-caviar programming may not have the same appeal.
When Netflix was cheaper and had fewer competitors, many people eagerly dropped their cable subscriptions to sign up for streaming. Now, with Netflix's higher prices and more available rivals, they seem to be reconsidering that choice. Indeed, Netflix has seen its U.S. market share decline from 52.4% in Q1 2020 to 42.4% in Q1 2022.
How Netflix is positioning itself for the fight
Netflix has over 222 million paid subscribers, including over 73 million in the U.S. – a strong sign of broad support. Until its recent 200,000-subscriber slump (which still represents just 0.09% of Netflix's total global audience), Netflix enjoyed a decade of avid subscriber growth.
Although Netflix co-founder and co-CEO Reed Hastings traditionally has "been against the complexity of advertising and a big fan of the simplicity of subscription," during the last earnings call, he mentioned that the company is open to offering a cheaper, ad-supported service. These efforts to offer a more affordable subscription might make Netflix an easier fit in many consumers' budgets, especially if those people have already cut travel and dining out. But Netflix can't compete on price alone. Instead, it also must keep up with the latest trends (including short form videos) and continue to release new popular content.
Netflix series and movies have made a big splash in global culture. Tiger King, Stranger Things, Bridgerton, Squid Game, and The Queen's Gambit are all examples of Netflix's ability to generate must-see content on a global scale. Netflix has dominated streaming, and now it is looking to break other areas of growth, such as video gaming. It has plans to double its gaming business this year, including releasing a chess game themed on The Queen's Gambit in the next six months. Its strategy is still in the experimentation phase, but could create even more opportunity to capture new areas of the marketplace.
At first glance, some pandemic stocks have fallen out of favor as the demand for home services has waned. Beyond using artificial intelligence to determine the most popular shows, Netflix is searching for the best ways to offer a unique service that will remain attractive in the current inflationary environment.
The psychological battle for Netflix
In its 24 years of existence, Netflix's business model has changed strategically to become the subscription-based streaming model it is today. Although most of us may not remember Blockbuster, Netflix's paradigm shift away from movie rentals to streaming has changed the landscape of entertainment. However, with advancing technology, the market has become more saturated with alternatives, forcing Netflix to compete not only on pricing, but also on content.
With the pressure of rising prices, Netflix's brand loyalty will likely be tested further as cost-conscious consumers continue to look for ways to stretch every dollar. Netflix began by revolutionizing the industry, and it had a decade of fast growth. Even though the stock appears to be undervalued and management is making decisions to attract new users, the economics of the industry are uncertain, and the market conditions are unfavorable. The company will take some time to recover and strategize, but there could be plenty of growth opportunities in the next decade. Netflix needs to shape the landscape again, into untapped markets and give even more consumers more entertainment that they cannot live without.