Why is Netflix suddenly so desperate?

On Tuesday, Netflix told investors that it had lost almost 1 million subscribers in the second quarter of the year, and would be hastening plans for a cheaper, ad-supported subscription tier and a clampdown on account sharing in an attempt to shore up its customer and revenue numbers. It’s the latest in a fairly long line of negative news stories about the streaming giant, which have included layoffs and a reported downscaling of production, particularly in animation and in prestige film and TV.

Why, in the middle of a streaming boom that Netflix has led from the front, is the company suddenly in trouble? There are a few potential reasons — and Netflix’s position at the vanguard of streaming is one of them.

With 220.6 million subscribers, Netflix’s audience is enormous, and genuinely worldwide. It could be reaching the point where there are few people left who might subscribe to it and haven’t yet — at least in prosperous countries with good internet access. As the first company out of the gate, it stands to reason that Netflix would be the first service to find itself testing the limits of how many people actually want a premium video streaming subscription.

Add to this the tough economic conditions at the moment, with energy and fuel costs rising sharply and a recession looming, and it’s easy to understand why Netflix’s seemingly unstoppable growth has gone into reverse. Netflix might represent good value for money as entertainment, but it’s still an inessential monthly cost that’s easy to cut if you’re a family trying to balance its books.

That’s the simple answer, and more or less the explanation that Netflix has been presenting to its investors. Cutting costs, adding a cheaper offering along with a new revenue stream (advertising), forcing moochers to actually pay — these actions all make sense for a company staring down the barrel of hostile market conditions.

But Netflix faces a bigger existential threat that it has yet to seriously tackle. And it’s one that gets to the heart of the real-world decision users are making as they hover over the unsubscribe button.

Of course, it won’t have escaped Netflix’s management that the service is facing much tougher competition now. But what the company doesn’t seem to be responding to is how that competition is exposing the weaknesses in Netflix’s actual product: its original films and TV shows.

In terms of sheer audience size, Netflix has only one close competitor — Amazon Prime Video — although the comparison is not quite like for like. Prime Video is estimated to reach about 200 million people, but it is only one benefit of an Amazon Prime subscription, and perhaps not even the most important one — that being guaranteed two-day delivery on most items bought from Amazon. While Prime Video is the only service to reach remotely as many homes as Netflix, it’s something of an outlier, since people might (and probably do) subscribe to Prime for other reasons.

Disney Plus has made enormous inroads in its brief two-and-a-half-year life. In fact, if you combine its 137.7 million customers with the 45.6 million subscribing to Hulu, you could argue that Disney is already in the same ballpark as Prime Video and Netflix. (Throw in the 22.3 million users of ESPN Plus, and Disney’s streaming subscriber base tops 200 million — although it’s worth noting that the company counts Disney Bundle customers three times.) HBO Max, meanwhile, has over 75 million subscribers. Paramount Plus, Apple TV Plus, and Peacock are each around the 30 million to 40 million mark. All these services (bar Apple’s) lean heavily on their parent companies’ position at the heart of Hollywood, combining original programming with fresh-from-the-theater movie releases and deep archives.

There are a lot of these services now, and few households can afford to subscribe to them all. Even setting aside Amazon Prime as an outlier, Netflix is fighting half a dozen serious competitors for the right to stay in your monthly budget. And if it is losing subscribers, it is because it is losing that fight in the place that really matters — exclusive stuff that people want to watch.

The best of these competitors have succeeded in building brands that people feel they have a relationship with, around shows and films that people love. It’s not rocket science; it’s show business. Disney Plus is an essential family utility and a gathering place for the millions of Marvel, Pixar, and Star Wars fans. HBO Max trades not just on franchises like DC and Game of Thrones, but on a hundred years of good old-fashioned Warner Bros. movie magic from Casablanca to Dune, plus HBO’s undisputed ownership of quality Sunday night TV drama. Apple, meanwhile, is setting itself up — with some success — as a sort of boutique version of HBO, making up for its lack of a back catalog by spending big on splashy originals with high production values.

Image: Disney Plus via Polygon

This is not to say that Netflix doesn’t make good stuff. Squid Game, Masters of the Universe: Revelation, and The Lost Daughter, to pick three recent releases more or less at random, are all great. But what do they have in common? How do they express what, if anything, Netflix stands for? And, perhaps more to the point, what about them makes viewers feel a connection that they want to maintain?

With the notable exception of Stranger Things, Netflix has failed to build a story universe with the staying power of those offered by its rivals. Amazon, in a similar boat, is simply buying world-famous franchises from the very top drawer: The Lord of the Rings and James Bond. Netflix’s deals — with Mark Millar, with the estate of Roald Dahl, with Rian Johnson for the Knives Out sequels, and to try to turn The Three-Body Problem into the sci-fi Game of Thrones — have potential, but are thinking too small and too piecemeal to bring any cohesion to the service’s catalog.

Hollywood production companies have been dining out on Netflix’s hunger for new content for years, but the streamer’s executives have been as fickle as they have been profligate, with itchy trigger fingers, prone to cancel shows before they’ve had a chance to build up a head of steam. It has bankrolled many brilliant movies from visionary filmmakers like Martin Scorsese and Jane Campion in its push for awards recognition, but its attempts to make movies for a broader audience have resulted in a succession of weak, aimless star vehicles that hit big on the algorithm but generate no conversation and foster no affection: the likes of Bird Box, Red Notice, and The Gray Man.

Photo: Frank Masi/Netflix

Within Netflix’s commissioning, production, and quality control, something isn’t working as it should. Perhaps it is because this is fundamentally a tech company that thinks like a tech company, measuring engagement in clicks and minutes watched but not in the more emotive storytelling terms that even the most ruthless of Hollywood studios (hi, Disney) is well versed in. It’s this attitude that has led to Netflix’s strict adherence to what was once thought to be its great innovation, but now looks like its biggest weakness: binge mode.

Netflix wants to keep people glued to its service, so it releases its TV shows in binge-ready complete seasons. This serves up great engagement stats in big, brief bursts. But most other streamers have withdrawn from this model or rejected it outright, recognizing that the rolling conversation and communal audience experience generated by weekly episode releases is the best kind of free marketing you can get, as well as a powerful incentive to keep that subscription going. Netflix’s biggest rivals now explicitly build their offerings around this almost old-fashioned concept of water-cooler TV: shows like The Boys, Obi-Wan Kenobi (and all the other Marvel and Star Wars shows), Euphoria, and Ted Lasso. Netflix feels increasingly absent from these conversations, and it’s telling that it chose to have two bites of the cherry with the latest season of Stranger Things.

With its scattershot content and blink-and-you-miss-them binge releases, Netflix is only exacerbating its struggle to keep subscribers’ attention. As it bumps up against the imminent, overlapping releases of The Lord of the Rings: The Rings of Power, House of the Dragon, She-Hulk, and Andor, and the noisy, monthslong conversations those shows are bound to generate, that struggle will get harder still. If Netflix is going to keep its subscribers and its position as the No. 1 streaming service, it will have to think hard about what it’s making and how it’s releasing it — not just how viewers pay for it.