The password sharers and exiled Russians were blamed for the drop. Analysts and company critics who spoke to Gizmodo told a different story, one of how a company that accrued large amounts of debt to finance its dominance could no longer support itself when subscriber numbers began to ebb.

The most popular streaming service in the world lost 200,000 subscribers in the first quarter of the year, where it had originally expected to gain 2.5 million. It predicted a loss of two million more for the next quarter.

The company has begun laying off employees in order to stave off further decline. Reed Hastings said on the Q1 earnings call that the issue was partially at the feet of consumers. He said the company's biggest issues were the competition from Apple, Amazon, and others.

  • 100 million subscribers who share passwords with friends and family, with 30 million of those based in the U.S. and Canada. This is out of a total 222 million global paid memberships.
  • The ongoing war in Ukraine, which cost Netflix 700,000 subscribers after it suspended service in Russia.

Some who have long been skeptical of the company are now calling it a bull because of how it described its financial troubles. The war in Ukraine, supply chain issues, and other reasons have caused other tech companies to struggle in the first quarter of this year.

Michael Pachter, a media analyst who has been critical of the company's business model, said that password sharing is the dumbest idea. They have always known about it.

Pachter said that during the April 19 announcement, both sides of the company spoke. The company acknowledged in its letter to investors that account sharing has not changed much over the years.

There is no excuse, Pachter said. Pachter questioned the logic of anyone who isn't paying for Netflix dropping money on a subscription if they are restricted from using another service.

It had been going well according to the previous quarter earnings. In the Q1 call, Hastings said that coming out of 2021, company growth was the logical conclusion. He said that the way forward was to restrict or monetize account sharing, perhaps add ads, and step up the quality of their content.

The decision regarding account sharing was not commented on by the company. During the early days of the covid pandemic, growth obscured the underlying issues with account sharing and how it was exacerbated by competition and data costs, according to the April 19 letter. The company wrote in its letter that sharing likely helped fuel our growth by getting more people using and enjoying the service, and that the company facilitates this with features like profiles.

Two screens, one bearing promotional images for Squid Game, another of actor Lee Jung-Jae accepts an award.

Laura Martin said that the weakness in subscribers was hidden until it was too late. She was surprised by the losses in subscribers.

Martin said that their interpretation worked until it didn't.

Some analysts think that the total number of subscribers could be hitting a wall, but the CFO of the company said that the number of people dropping subscriptions was dropping. According to a report by the consulting firm, there is an estimate of as high as 37% for US consumers when it comes to streaming networks. It's hard to tell from the outside just how much of the content of the service is there, because it's not publicly available.

How did Netflix fall so far?

Sara Silver is a journalism professor at both Quinnipiac University and Columbia University, having spent years working as a reporter on media finances. She teaches classes about finances for students and journalists. She believes that the issues that were apparent for years in last year's earnings were due to the fact that the company was expecting another year of massive growth.

The story they told was that when the denominator got bigger, it would make sense. We will be cash positive in the future. We are going to have more subscribers and more income when we aren't.

There was a new wave of competition in 2015. The company borrowed a total of fifteen billion dollars to fight back. To cater to the U.S. or western markets, the company wanted to create products that people in South Korea, Japan, and Nigeria would enjoy.

The trajectory of the stock price from 2015 to 2021 showed that the company was much more attractive to investors because of all the spending. It was a good thing for the company. A worldwide population was stuck in a constant state of boredom, as a result of productions shutting down, meaning less money was spent in the short term. They had over 200 million paying customers. The company was finally cash flow positive after nearly a decade, and the stock price was the highest it had ever been.

The company's new positive cashflow was thought to be a boon to the company, and that the bears on the stock were finally exposed as crying wolf.

A scene from Space Force starring Steve Carrell sitting in front of a desk.

The company outlined an approach in its Q4 earnings. The company announced in its Q4 report that it would buy back its own stock and pay off some of its bonds that were due, leaving around $15.4 billion in gross debt.

Buying back stock when you think your stock is cheap is hard to say when it is $700 a share.

Pachter agreed that the company was over confident in its predictions.

He said that management thought they would grow in perpetuity and every subscriber would be profitable.

There is still a bigger issue with the business model. Most of its shows and movies are freely available to binge, meaning that customers can watch hundreds of shows that they don't want to watch. It means that in order to keep subscribers, they have to keep producing content that caters to different audiences at a higher rate than their competitors.

The buzz for a show like Game ofThrones lasts for months as a season airs, because people come back to it every week. The bingeable shows model had worked for years, but executives needed to point the blame elsewhere.

Silver said that it was a ploy. The problem is things outside their control when things go wrong.

The myth of the invulnerable Netflix

It has been trying to control the narrative about its rise to fame. Critics of the company's business model were often seen as fist-shaking outliers by the larger consensus of Wall Street analysts.

A scene from Another Life

The company's strategy of maintaining billions of dollars in debt and accruing more with stock buys seems to be changing. In its Q1 earnings letter, the company said it had paid off $700 million of its debt, putting it in the top end of their $10-15 billion range. During that quarter, it made less stock buys than it had in the previous ones.

It will be a difficult road for the company, especially considering its competition. Martin pointed out that other companies like Apple and Amazon can spend $20 billion on original content and not blink.

She is optimistic that including an ad tier will help the company get back on track. Ad-supported subscription tiers were recently introduced to Disney+, and the company could be releasing its own version by the end of the year.

Silver said that the way in which the company uses its debt needs to be changed.

People think they can just buy a slice of the market and not worry about it. The market is going up. She said that Netflix proves that not always the case.

Pachter doesn't think the company will change much despite the stock drop. Its mission and top executives are the same. Hastings is considered a visionary and the company is in lockstep behind him, which is why the analyst suggested a shakeup in executive leadership.

After finishing the latest season of Ozark in a single weekend, Pachter is looking for something else to watch. He doesn't plan to stop sharing his account with his family any time soon.