Netflix (NFLX 1.34%) has had a bumpy 2022. The company reported a dip in subscriber numbers for the fiscal first quarter -- its first customer decline in over a decade -- and lost almost 1 million more in the second quarter. Netflix's stock price has also dropped significantly, falling from a high of approximately $690 per share in November 2021 to around $225 at the end of July.
To deal with its challenges, Netflix has outlined two key plans to reignite growth. The first is a scheme to charge those who share their account logins with others a fee for the privilege of doing so. The second is to introduce an ad-supported plan that will be cheaper than existing tiers. However, with many U.S. economists predicting a recession before the year is out, Netflix's strategy may soon run into trouble.
Image source: Getty Images.
Netflix's simplicity is both a strength and a weakness
For investors, Netflix is a relatively straightforward prospect; the company operates an on-demand streaming service, serving up a mix of original shows and movies as well as content from third-party studios. And while the company has dabbled in the film theater industry and mobile games, the lion's share of Netflix's revenue still comes from its global subscriber base -- around 220 million at the time of writing.
Netflix competitors Disney+, Amazon Prime Video, and HBO Max are all attached to parent companies that operate other businesses (theme parks, online retail, cable networks, etc.) and therefore have more diverse revenue streams. Of course, it'd be a fool's errand to try to predict what would happen to any company in the face of the next economic downturn, but Netflix's heavy reliance on subscribers means it can ill afford to lose the customers it has.
The risk of upsetting consumers
Netflix has announced two pilot schemes to determine how best to charge subscribers who share their accounts. One test has been to levy a small fee for such customers in Peru, Chile, and Costa Rica, but according to reports, the move has left some wondering what constitutes a household. A second test -- set to roll out later this month in Guatemala, El Salvador, Honduras, Argentina, and the Dominican Republic -- will track smart-TV usage. Accounts that are showing up on TVs in other locations will be subject to additional charges.
While both these plans are still in the testing phase, Netflix has been clear that it intends to roll out a fee scheme for password sharers across even more markets in 2023. Nonetheless, it could be challenging for Netflix to introduce new charges for consumers in the midst of a recession. Again, subscribers are the source of Netflix's revenue. And while account sharing has long been against Netflix's rules, the crackdown might not sit well with many.
Ad sales could be headed south
Economic downturns are often foretold by a dip in consumer confidence. In turn, marketers typically follow suit, curtailing ad spending -- something Roku has recently spotted in its second-quarter results. And, of course, when a recession is in full swing, it's typical for ad spending to remain relatively low when compared to more opulent times.
Netflix has earmarked an early 2023 launch for its ad-supported tier, pitching it as a lower cost of entry for those who are OK with marketing messages. But if Netflix finds there's a paucity of ad dollars to go around, then it's feasible the company could end up running the plan at a loss. That might be fine in the short term, but should a downturn continue for multiple quarters -- as it did with the Great Recession between late 2007 and mid-2009 -- then Netflix could find itself pumping money into its cheapest plan for a while.
Still, as things currently stand, the U.S. is not officially in a recession, and Netflix's plans are still actively moving forward. But should the economy follow the trajectory many are speculating it will, then the streamer's growth strategy might need to be rethought if it doesn't want to upset subscribers or have to subsidize its entry-level tier for too long.
