Netflix: rise, fall and recovery

Deanna Kathleen de Zilwa

Netflix: its rise, fall and recovery Deanna Kathleen de Zilwa

is based at the School of
The subscription video on demand (SVOD) industry involves customers paying a Business, Murdoch
subscription fee to stream movies and TV shows over the internet to watch at their University, Perth, Australia.
convenience on smart TVs, mobile phones, tablets and gaming consoles. The SVOD
industry has disrupted the linear and cable TV and movie industries. Netflix was the first
mover in the SVOD industry when it began streaming entertainment in 2007. Subsequently,
other companies have entered the industry, including Amazon Prime Video, Apple TV,
YouTube TV, Paramountþ, Disneyþ, HBO Max and Hulu, but Netflix has traditionally
dominated these competitors (Durani, 2023).
Netflix enjoyed a growth phase during the early stages of the pandemic, 2020–2021, as
subscriber numbers and revenue increased. Then, in early 2022, Netflix’s halcyon days
abruptly ended, the company lost millions of subscribers and its revenue and stock
price crashed. Late 2022 and 2023 saw a reversal of Netflix’s decline.

Netflix was chosen as the single case study rather than one of its competitors because, as
the market leader in the SVOD industry, Netflix is the critical case (Frey, 2021; Yin, 2018,
p. 49). A multiple-case study design would have required analysing and reporting on a
much larger data set, which was beyond the scope of the present study.
This case study uses qualitative research methods. It follows the principle that triangulation
from multiple sources of evidence (data triangulation) strengthens the rigour of the study
(Yin, 2018, pp. 128–129). Accordingly, the study analysed three data sources. Two primary
sources were obtained from the investor relations section of Netflix’s web page: earnings
calls transcripts and accompanying videos and letters to shareholders. Secondary sources
included articles written by investment analysts, journalists, journal articles and books. An
earnings call is a conference call, usually a webcast, where executives of public companies
discuss the financial performance of the company over the previous quarter and issue
forecasts for performance over the next quarter (Corporate Finance Institute, 2023).

DOI 10.1108/JBS-08-2023-0177 VOL. 45 NO. 6 2024, pp. 405-413, © Emerald Publishing Limited, ISSN 0275-6668 j JOURNAL OF BUSINESS STRATEGY j PAGE 405
 Typically, several investment analysts from major investment companies participate in
earnings calls, asking company executives questions about financial performance, later
using this information to inform their investment decisions. Notably, only one investment
analyst participated in the Netflix earnings calls. Thirteen earnings call transcripts/videos
and letters to shareholders from 2020 to 2023 were analysed for this study.

Netflix’s growth: 2020–2021

Table 1 indicates Netflix’s milestones before 2020. Netflix experienced growth from 2020 to
2021; subscriber numbers increased; and revenue and profit increased as well. Table 2
indicates the rapid and substantial increase in global streaming paid memberships from Q1
2020 (182 million global subscribers) until Q4 2021 (221.84 million global subscribers).
Table 3 demonstrates that Netflix’s increase in overall subscriber numbers and additional
new subscribers enabled the company to generate a steady increase in revenue from 2020
until 2022. However, throughout this period, operating margin results fluctuated, reaching a
peak of 27.4% in Q1 2021, decreasing to 8.2% in Q4 2021, with the weakest operating
margin of 7% posted in Q4 2022; see Table 3.
Why did Netflix achieve such exponential growth in subscriber numbers over a relatively
short time? The answer to this question has two dimensions. First, the company benefitted
from a black swan event, the pandemic, which spread around the globe in March 2020.
Before the development of the COVID vaccine, the main mechanism to reduce the death toll
and hospitalizations was to force people into lockdowns in their homes. This situation meant
that people were unable to enjoy their regular leisure pursuits outside their homes. People
took out Netflix subscriptions for entertainment, to alleviate boredom and as an escape from
the depression, anxiety and fear caused by the pandemic (Peters, 2020a, p. 7; Nisbett
et al., 2022, p. 226). Second, customers chose Netflix over rival streamers because it was
the market leader in the SVOD industry and it provided a superior customer value
proposition (Peters, 2020b p. 8; Frey, 2021, p. 7). Netflix had obtained this advantageous
strategic position because its executives had made prudent strategic decisions over the
last decade. The primary decision that provided the foundation of Netflix’s attractive
customer value proposition was setting reasonable price points for subscriptions. These

Table 1 Netflix’s milestones before 2020

Year Milestone

1997 Netflix was founded as a DVD rental company by Reed Hastings & Marc Randolph
1999 Developed a subscription-based business model to increase customer retention
2000 Introduced the CineMatch algorithm to monitor customer rental patterns; the data was then
used to provide recommendations for customers
2002 Netflix’s IPO
2003 First profit earned $6.5m from $272m in revenue, awarded US patents for the
recommendation algorithm and reached over a million subscribers
2007 Launched an internet streaming service Watch Now, and customers could watch videos on
demand
2008 Commenced moving platform hosting infrastructure to the Cloud
2010 Expanded operations to international markets: Canada, Latin America, the UK and Nordic
countries
2011 Announced the plan to split the DVD rental business from the streaming business; a new
company was to be called Qwikster, and customers would need to pay two subscriptions if
they wanted both services, Customer backlash Netflix lost 800,000 subscribers and reversed
the decision to form Qwikster
2013 Produced the first original content TV shows, House of Cards and Orange is the New Black
2018 Netflix wins 23 Emmy Awards for its TV shows
2019 Netflix wins four Academy Awards for its films
Source: Funding Universe (2023); Jain (2023); Netflix (2023a)

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 Table 2 Netflix global streaming paid memberships and paid net additions Q4 2019–Q4
2022
Global streaming paid Global streaming paid
Time period memberships (millions) net additions (millions)

Q4 2019 167.09 8.76

Q1 2020 182.86 15.77
Q2 2020 192.95 10.09
Q3 2020 195.15 2.20
Q4 2020 203.66 8.51
Q1 2021 207.64 3.98
Q2 2021 209.18 1.54
Q3 2021 213.56 4.38
Q4 2021 221.84 8.28
Q1 2022 221.64 0.20
Q2 2022 220.67 0.97
Q3 2022 223.09 2.41
Q4 2022 230.75 7.66
Sources: Netflix, Letter to Shareholders, Q4 2019, Q4 2020, Q4 2021 and Q4 2022

Table 3 Netflix revenue and operating margin Q4 2019–Q4 2022

Time period Revenue (millions) Operating margin (%)

Q4 2019 $5,467 8.4

Q1 2020 $5,768 16.6
Q2 2020 $6,148 22.1
Q3 2020 $6,436 20.4
Q4 2020 $6,644 14.4
Q1 2021 $7,163 27.4
Q2 2021 $7,342 25.2
Q3 2021 $7,483 23.5
Q4 2021 $7,709 8.2
Q1 2022 $7,868 25.1
Q2 2022 $7,970 19.8
Q3 2022 $7,926 19.3
Q4 2022 $7,852 7.0
Sources: Netflix Letter to Shareholders Q4 2019, Q4 2020, Q4 2021 and Q4 2022

price points reflected customers’ capacity to pay, set higher for customers in the USA,
Canada and European markets and lower in India and other South-East Asian countries.
Netflix’s Chief Operating Officer said the company was “continually looking at how to
broaden accessibility. How do we bring in price points that are low enough to allow more
and more of the world’s population to be able to access the service” (Peters, 2021a, p. 10).
He asserted:
Netflix is not a substitutable good. We have incredible stories, movies that you can only see on
here, great TV shows, games coming. The value equation for any given member is whether they
are getting good value for what they are paying (Peters, 2021b, p. 8).

Additionally, executive decisions created five distinctive capabilities that made Netflix a
more appealing option than rival streamers. First, the breadth and diversity of genres of
Netflix’s content: animation, documentaries, unscripted, comedy, romance, action, children
and original meant that it was an attractive option for families with adults and children of
different ages with diverse tastes. In contrast, competitors’ content slates were limited to
niche markets: Disney þ content primarily appealed to younger children, and HBO Max had
only a few original programs and few options for subscription plans. Second, Netflix’s

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 content appealed to customers because of its high quality. Netflix won 44 Emmy awards for
its TV shows and 7 Academy Awards for its films in 2021. Third, Netflix operates in 190
countries; its content is available in many languages and reflects a broad gamut of cultural
values and interests (Pereira, 2023). None of Netflix’s streaming competitors operate in as
many international markets. Fourth, Netflix created TV shows and movies from many
countries reflecting local cultural norms and stories and garnered widespread interest in
this content from customers around the globe. Squid Game, a Korean TV show, attracted
142 million viewers in its first few weeks (Gupta, 2021, p. 7). Fifth, Netflix’s platform uses a
sophisticated algorithm to harvest data about user preferences and then uses this data to
provide customized recommendations for users, enhancing customer engagement,
satisfaction and retention (Frey, 2021, pp. 78–84).

Netflix’s decline: January–July 2022

Netflix experienced a significant decline in subscriber numbers, share price and market
capitalization during the first six months of 2022. At its Q1 2022 earnings call, executives
announced that the company had lost 200,000 subscribers over the quarter (Netflix, 2022a,
p. 5). This was the first time subscriber numbers had declined in a decade. Netflix
shareholders were anxious about the loss of subscribers and, following the announcement,
shares fell 35%, wiping $50bn off Netflix’s valuation (Hellmore, 2022). Shares had declined
from $700 per share in November 2021 to $244 per share in April 2022. In their Q1 2022
letter to shareholders, Netflix executives described the decline in subscriber numbers as
“revenue growth headwinds”, identifying four interrelated factors to explain why subscriber
numbers had declined: reduced uptake of Smart TVs;, 100 million customers sharing
account credentials; greater competition from rival companies; and macro factors such as
inflation, Russia’s invasion of Ukraine and disruption from the pandemic (Netflix, 2022b, pp.
1–2). Note the common theme with each factor: that an external agent/event was
responsible for the loss of subscribers rather than Netflix leaders’ decisions. However,
investment analysts, researchers and some customer segments were dissatisfied with
Netflix’s content, pricing and value and lacked confidence in the company’s leadership.
A survey of 1,000 Americans’ streaming habits in 2022 found that one in four respondents
was planning to leave Netflix; 40.49% of respondents identified the high cost of Netflix in
contrast to competitors as the reason for cancelling Netflix (Kerai, 2022). In the USA, Netflix
had the highest average monthly cost for a subscription, $15.15. Apple TVþ was $4.99,
Peacock $7.49, Paramountþ $7.49 and Disneyþ $7.99 (Kerai, 2022). A total of 22% of
respondents claimed that Netflix lacked content they wanted to watch, and TV shows and
movies that Netflix had licensed were removed to build the libraries of HBO Max, Disneyþ
and Peacock (Kerai, 2022).
Research by the consultancy firm Deloitte indicated that the entire SVOD industry, not just
Netflix, faced challenges because Gen Z and millennials prefer to watch user-generated
content such as YouTube or Tik Tok videos, which are free, short and relevant to their
interests. They also play interactive games, stream music and podcasts. If they take an
SVOD subscription, they opt for a cheaper ad-supported tier (Deloitte, 2023). Deloitte’s
survey of 2020 American digital media trends in 2022 found that “overall subscriber churn
for paid SVOD subscriptions (Netflix and competitors) was 44 percent, [. . .] For Gen Z and
Millennial consumers, those numbers jump to 57percent and 62 percent respectively”
(Deloitte, 2023).
Netflix forecast that they would lose two million subscribers during Q2 2022, but the actual
results were better than anticipated, and they lost only 970,000 subscribers (Netflix, 2022c,
p. 5). The analyst at Netflix’s Q2 2022 earnings call asked why the loss was less than
anticipated. Wilmot Reed Hasting, then CEO and now Chairman of the Board, responded
that they were executing well on the content side and that they were improving the service.
The merchandising, he said, was “so tough, in some ways, losing one million is a success”

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(Netflix, 2022c, p.5). The analyst asked whether the recent price increases for subscriptions
in major markets caused the churn in subscribers. Spencer Neumann (2021), CFO,
responded, “We had some elevated churn early in the quarter because we had some big
price changes, big markets that had price increases like U.S., UK, Ireland, early in both Q1
and rolling through Q2” (Netflix, 2022c, p. 5). Later, the CFO described the elevated churn
in subscribers as “near-term headwinds”, asserting that as time passed, the rate of churn
would decline.
Investors, analysts and the media remained concerned about Netflix’s loss of subscribers.
Netflix was one of the worst-performing stocks in the S&P 500 in 2022 as the price of its shares
decreased by 60%, wiping $70bn of the valuation of the company (Klebnikov, 2022;
McCluskey, 2022). Shareholders filed class action lawsuits against the board, alleging that
they had “breached its fiduciary duty, committed securities law violations and harmed the
company’s reputation” by ignoring financial analysts’ warnings that Netflix’s loss of
subscribers, reduced share price and market capitalization were because of mismanagement
(Hudson, 2022).

Recovery: July 2022–July 2023

Netflix’s performance recovered from July 2022–July 2023. Its revenue, operating margin
and market capitalization increased, although, as Table 4 indicates, Q4 2022 was the outlier
in this overall trend. Revenue and operating margin declined in this quarter, but both
metrics improved the following quarter.
Why did Netflix’s performance recover? In Q3 2022, executives pursued a new strategic
goal: revenue growth. Their key strategic goal before this time was increasing subscriber
numbers. An analyst at the Q3 2022 earnings call asked why they would no longer provide
guidance to subscribers. Spencer Wang (Vice President Finance, Corporate Development
and Investor Relations) responded:
Focusing on subscribers in the early days was helpful. But now that we have such a wide range
of price points, different partnerships all over the world, economic impact of any given
subscriber can be quite different. And that’s particularly true if you’re trying to compare our
business with other streaming services. That’s why we’ve been increasingly focused on revenue
as our primary top line metric (Wang, 2022).

When Wang states that “the economic impact of any given subscriber can be quite
different”, he is referring to the fact that average monthly revenue per paying streaming
customer varies according to region and the cost of their plan. In the USA and Canada, the
revenue per customer is $16, whereas it is $7.66 in Asia/Pacific (Stoll, 2023).
Netflix pursued four tactics to increase revenue: In Q1 2023, the company reduced
subscription prices in 116 countries where it had low market penetration to attract more
customers. Here, Netflix was copying the tactic that it had previously deployed in India,

Table 4 Netflix’s revenue, operating profit margin and market capitalization Q3 2022–Q2
2023
Market capitalization
Time Revenue (millions) Operating margin (%) (billions)

Q3 2022 $7,926 19.3 $104.7

Q4 2022 $7,852 7 $131.23
Q1 2023 $8,162 21 $153.58
Q2 2023 $8,187 22.3 $195.82
Sources: Netflix Letter to Shareholders Q2 2023 and Netflix Market Capitalization, 2023; available at:
[Link]

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 where prices were reduced by 20–60%, increasing revenue by 30%. Second, they
introduced advertising-supported subscription plans. Third, they monetized account
sharing, and, finally, they added games.
Netflix’s CEO, Reed Hastings, was opposed to having advertisements on Netflix, but the
serious decline in the company’s performance in 2022 prompted him to reverse this
decision, and an advertising-supported tier was launched in November 2022 in 12
countries. This was a key decision. The advertising-supported plan created a new revenue
stream in income from advertisers. The decline in customers watching linear TV and the
growth of the SVOD industry gave Netflix 7% of viewers in the USA and 9% of viewers in the
UK (Netflix, 2023c). The advertising-supported plans were attractive to customers who did
not want to pay for the more expensive advertising-free standard or premium subscriptions,
so it helped to reduce churn rates.
The rollout of the ad plan was well executed. The speed of the launch of the advertising-
supported tier, six months from announcement to implementation, enabled Netflix to garner
additional revenue sooner. The decision to partner with Microsoft for the rollout of the ad
plan facilitated the quick and successful implementation of this project. Netflix executives
announced that they expected that “advertising would develop into a multi-billion
incremental revenue stream” (Netflix, 2023b). In Q2 2023, Netflix discontinued the basic
subscription plan in Canada for new and returning customers and announced that they
would also discontinue the basic plan in the USA and UK, too. This was a smart tactic as it
pushed customers looking for a cheap subscription to the ad plan, where Netflix gained
revenue from advertisers as well as subscribers (Netflix, 2023b).
The initiative to monetize account sharing sought to stem the loss of revenue from the 100
million people using Netflix by sharing someone else’s account credentials. This involved
the geolocation of IP addresses and device IDs and users had to enter a code to verify their
credentials. Account holders could pay extra to share their account with users outside their
houses and incentives were provided for “sharers” to pay for their accounts, enabling them
to transfer their user profiles and recommendations to their new accounts. Even though this
project had the potential to backfire and lead to elevated churn, it was successful:
In May, we expanded paid sharing to 100þ countries, which account for over 80% of our revenue.
The cancel reaction was low and while we’re still in the early stages of monetization, we’re seeing
healthy conversion of borrower households into full paying Netflix memberships as well as the uptake
of our extra member feature. We are revenue and paid membership positive vs. prior to the launch of
paid sharing across every region in our latest launch (Netflix, Letter to Shareholders Q2 2023, p. 5).

Netflix’s fourth tactic to increase revenue was adding mobile games to its entertainment
offerings, but this tactic differed from the others because it had a long-term horizon. In
2021, Netflix purchased its first gaming studio, Night School, then purchased three
additional gaming studios and established two in-house gaming studios (Gordon, 2023).
“There are some 67 games in the Netflix library, playable through its iOS and Android apps;
86 more are in development, with 16 of those being made by in-house studios.
Consequently, Netflix Games has swollen to 450 employees” (Gordon, 2023). Many mobile
games use a free-to-play business model where monetization occurs through in-app
purchases of items to progress in the game or advertisements. Netflix has decided not to
follow the free-to-play business model in the games it has released to date; in fact, Netflix
pays game creators to host their titles as part of their subscriptions. Moving into gaming is a
smart strategic tactic. Netflix executives are aware of the research that shows that Gen Z
and millennials spend substantial amounts of time playing games. Yet they are aware that
mobile gaming is an extremely lucrative entertainment business, generating $US248.4bn in
revenue worldwide in 2022 (Clements, 2023). Revenue from mobile gaming is projected to
reach $US286.5bn worldwide in 2027 (Clements, 2023). Given how lucrative mobile gaming
is forecast to become, Netflix will likely seek a share of this revenue in the future.

PAGE 410 j JOURNAL OF BUSINESS STRATEGY j VOL. 45 NO. 6 2024

Key lessons from Netflix’s rise, fall and recovery
This case study has shown that Netflix faced significant challenges during the first six
months of 2022: losing large numbers of customers, declining revenue and profit, a sharp
deterioration in share price and the market capitalization of the company being sued by
shareholders accusing the company of mismanagement and competitors with similar or
substitute products taking market share. Yet Netflix’s leaders were able to overcome these
adversities and turn the company’s fortunes around. There are key lessons that other firms
can take away from this case study and apply should their firms find themselves in similar
scenarios.
The key reason Netflix was able to recover from its severe decline was that its leaders faced
challenges head-on. They realized that they needed to make drastic changes to recover
from the dire situation the firm was in. Wilmot Hastings, CEO at the time, acknowledged that
he had been averse to having advertisements on Netflix, yet when the company’s
performance severely deteriorated, he was willing to reverse this long-held position.
Similarly, for many years, Netflix’s leaders had turned a blind eye to password sharing, but
when they realized that up to 100 million people were accessing Netflix by using members’
credentials and they were losing substantial revenue, they developed initiatives to address
this situation. The decision to reduce prices in the 116 markets where they had low
penetration and the decision to abandon the basic subscription plans in Canada, the USA
and the UK stand as further evidence that the leaders were willing and able to reverse or
alter previous decisions when necessary. In contrast, less effective leaders might have
displayed hubris, inertia and path dependency, blindly believing that the downturn in their
firm’s performance was a temporary setback and that there was no need to change their
existing strategies and tactics.
Netflix’s leaders have a history of making bold changes in the company; it was initially a
DVD rental company, then it started streaming TV and movies in 2007. In 2013, it began
making original content, and in 2016, it entered international markets. During the
pandemic, Netflix’s leaders made key changes to the company’s strategy, and their key
goal now is increasing revenue, whereas previously their key priority was increasing
subscriber numbers. Over this period, Netflix’s leaders have been innovative. When the
decision was made to introduce advertising, they realized that they could not implement
the initiative independently, so they partnered with Microsoft, which had the technical
capacity and existing relationships with brands that facilitated a quick and successful go-
to-market with this initiative. Similarly, when Netflix’s leaders decided to move into gaming,
they acquired established game developers as well as developed their capacities in this Keywords:
business. Netflix,
Crisis,
Netflix’s rise, fall and recovery stand as an exemplary case of survival that ultimately came Recovery,
to fruition because its leaders had sufficient humility to realize their mistakes and the SVOD (subscription video
integrity to rectify them, displaying boldness and fortitude to take risks and innovate. on demand) industry

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[Link]/how-when-netflix-start-brief-company-history/ (accessed 25 August 2023).

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subscriber miss”, Variety, 4 May 2022, available at: [Link]
lawsuit-shareholders-subscriber-miss-1235258330/ (accessed 25 August 2023).

Corresponding author
Deanna Kathleen de Zilwa can be contacted at: dkdezilwa@[Link]

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