Netflix (NFLX 1.23%) has had a rough 2022 so far. The company reported a loss of 200,000 subscribers in its fiscal first quarter, and it expects to disclose another 2 million lost in its second-quarter earnings report later this month. Subsequently, Netflix's share price has been tracking below the S&P 500 index for several months, and it has cut hundreds of jobs.
The company has announced strategies to tackle the decline in revenue, including the launch of an ad-supported plan aimed at cost-sensitive consumers and a crackdown on password-sharing. However, it has yet to reveal specifics of the ad-supported tier, and a pilot scheme to geo-restrict accounts has left many customers questioning what constitutes a "household." So what else can Netflix do to remain competitive?
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Content, content, content
Unlike rivals HBO Max and Disney+, Netflix was not constructed on the foundations of an existing media empire. Both Warner Bros. Discovery (WBD 0.76%) and Walt Disney (DIS -0.26%) have origins dating back almost 100 years, giving them deep libraries of movies, shows, and characters. By contrast, Netflix has existed since 1997, and Lilyhammer, the first Netflix exclusive content, didn't arrive until 2012.
Netflix has actively spent many billions of dollars over the last decade to ensure it has a broad bank of content to satisfy subscribers. For example, the company shelled out $8.9 billion in 2017 on acquired and original programming, while this year it expects to hit as much as $18 billion, its biggest annual spend yet.
The "spend big" strategy
With the challenges it is facing, Netflix could be forgiven for paring back its content spend for 2022. But co-CEO Ted Sarandos has said it has no plans to do so, suggesting instead that original films and TV will be key to the streamer's return to growth.
In an interview recently with the French newspaper Le Journal du Dimanche, Sarandos said that the company broke viewing figures last year with originals like Don't Look Up and Squid Game. The executive also cited the inclusion of Kate Bush's 1985 song Running Up That Hill in an episode of Stranger Things -- and the fervor it generated -- as a cultural moment in itself. Viewed through this lens, it's easy to see why the company is resisting paring back spending.
300-pound gorillas
Despite its enormous vault of movies and shows, Walt Disney is still focused on generating new properties to satisfy viewers. This year alone, the company will spend $33 billion on content, overshadowing Netflix by a significant amount. Disney's approach to spending is one reason some analysts predict Disney+ will have more subscribers than Netflix by 2026.
Warner Bros. Discovery is taking a different tactic: tightening its belt. The company recently suspended production on many HBO Max originals across Europe as it seeks to save at least $3 billion annually. CEO David Zaslav said the move was about ensuring the company focused on quality over quantity, though perhaps that's an easier argument to make when pulling from decades of original content.
Fewer subscribers could mean fewer Netflix Originals
By all indications, it seems Netflix believes it has the right blend of tactics to ensure it can remain competitive for a long time. But with its ad-supported tier and password restrictions still in the planning stages, will spending big be enough to right the ship in the short term? Every time a subscriber cancels, that's less money the streamer can invest in original shows.
It will be worth keeping an eye on Netflix's second-quarter results, which will be published on July 19. One would expect the company will discuss in more detail its ad-supported plans, and just how it intends to enforce password-sharing restrictions. But beyond that, it will be interesting to see if the company provides insight into its content budgets -- particularly whether it expects to rein in spending to keep pace with its competitors.
