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The real reason why Netflix stock is down

In a letter to shareholders, Netflix said it lost domestic subscribers due to price increases. Investors worry about incoming competition and loss of popular shows like 'Friends.'

This March 19, 2018, file photo shows the Netflix app on an iPad in Baltimore. Netflix is placing educational documentaries on YouTube for free use.
FILE- This March 19, 2018, file photo shows the Netflix app on an iPad in Baltimore. Netflix reports financial results Tuesday, April 16, 2019. (AP Photo/Patrick Semansky, File)
Patrick Semansky, Associated Press

SALT LAKE CITY — For the first time in eight years, Netflix lost U.S. subscribers.

Netflix missed the mark on its expected earnings and subscriber growth this quarter and in a letter to shareholders, the company attributed the slowdown to price increases, assuring investors that competition in the streaming market was not the cause.

But the streaming service is facing competition in a market that it once dominated. While CEO Reed Hastings once said “sleep” was the No. 1 competitor, that kind of confidence isn’t flying anymore.

With WarnerMedia pulling “Friends,” the most watched show on the platform, and Disney launching its own streaming service (and ending its distribution agreement with Netflix), the field is about to get much more crowded.

The race for eyeballs inevitably requires the production of content, preferably content that the streaming service has the rights to. Netflix has known this for quite some time, and spent $12 billion on creating original shows and movies in 2018, according to Variety. The company is expected to spend $15 billion this year.

As the “streaming wars” continue, the people responsible for creating “content” may be the biggest winners as billions of dollars are unleashed in a race to find the next big hit.

According to Bloomberg, although investors have been willing to ignore the huge spending budget and continued losses, the drop in subscribers is causing concern.

“Library content won’t kill the Netflix U.S. subscriber story. However, it will force them to continually spend on riskier, high-profile concepts, market their shows more aggressively, and allow competitors to copy Netflix’s initial approach in building out their own services,” said one analyst quoted by Barron’s.

That means the only way for Netflix to gain subscribers is to keep pumping out content and taking the continued hit to revenue.

“Those platforms that control the largest content libraries are regarded as having the best shots at streaming-war success. This means that many rights-owning studios once happy to earn extra money licensing shows to Netflix are letting such agreements expire as they build S.V.O.D.s of their own,” according to a piece in The New York Times.

Part of the company’s problem is that it has tried to place itself in a different category from companies like HBO and Disney. It was a platform, a disrupter; it was based in Sillicon Valley, not Hollywood.

In a letter to shareholders in January, the company said “We compete with (and lose to) Fortnite more than HBO.” The letter went on to state, “Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”

But, as CNBC pointed out, “Netflix is just one of many channels that provides you with entertainment — not a competitor to the entire pay-TV ecosystem.” Now, the company is in the same boat as other media companies, trying to create films and television shows that persuade consumers to subscribe and stay subscribed.

Every market has its threshold; 24% of TV watchers say they have too many subscriptions already, according to Forbes. The conclusion: people won’t pay for more than four or five services.

Investors were already worried about the company’s ability to maintain growth. Money manager Mark Tepper told CNBC that because the stock has been trading at $400 per share, there is sensitivity to the point the stock can “no longer realize that kind of extreme growth.”