Streaming Pioneer Netflix (NFLKS 1.25%) experiencing an incredible fall from grace. The company is grappling with the fallout from the coronavirus outbreak after an initial boom. At the time of this writing, Netflix shares are trading at $172 per share, up from over $600 at the end of 2021.
Despite the bad news, there are actions Netflix can take to bounce back from the crash. Converting roughly 100 million free riders into paying members would be a good start. A successful launch of the ad-supported version can encourage subscriptions from thrifty viewers. Finally, abandoning the box office avoidance strategy will eliminate competitive advantage.
1. Netflix could stop free users
Strikingly, Netflix management estimates that 100 million households watch its content for free. It’s no surprise that people share their passwords with friends, family, and classmates outside the home, but the magnitude of the phenomenon has taken some investors by surprise. By comparison, as of March 31, Netflix has 222 million paying subscribers. Netflix can increase its subscriber base by 45% almost instantly by making those free riders pay.
These are people who have already proven that they use the Netflix service. It’s a matter of developing and implementing Netflix technology to limit the use of a predetermined number of devices. If an account can only be registered on four devices, paying members will be more careful about sharing their registration information.
2. Cheaper ad-supported tier
Netflix has long opposed offering a cheaper, ad-supported version of its service. However, management agreed to their last conference call when CEO Reed Hastings said he had changed direction and plans to launch an ad-supported version as early as this year. This can help recover stocks for several reasons. First, it could boost subscribers and revenue growth as frugal consumers who were on the edge became members. It could also give investors confidence that management is ready to make bold changes when needed.
The courage to admit that your course of action is not ideal, and to change course, is a desirable quality in a leader. The enterprise has always been and will be a dynamic undertaking; stubbornness rarely pays off in the long run.
3. Release films on the big screen
The company has long ditched the big screen in favor of releasing new movies straight to its streaming service. The strategy of abandoning the box office is depriving Netflix of a lucrative source of income. For example, DisneyX (DIS 0.06%) Doctor Strange in the multiverse of madness grossed over $932 million at the box office. The film likely recouped its production costs, and then some. It will soon be launched on the Disney+ streaming service, which will attract subscribers and help retain existing subscribers.
By ditching the big screen, Netflix isn’t generating revenue from theaters. He then leaves the weekend to competitors who take full advantage of moviegoers. In the past decade alone, Disney has released 25 films to the big screen, each grossing over $1 billion in ticket sales.
Netflix’s pre-pandemic strategies worked well when competition was only limited. But they are unlikely to be as effective once the pandemic subsides. Shareholders are encouraged by the fact that management has expressed a willingness to adapt.
Shares have already paid an incredible price, as evidenced by their sharp decline. With a price-to-earnings ratio of 15.8, it’s almost as cheap as it’s been in the past five years. If a company implements the aforementioned changes, it could very well bounce back. True, the recovery may not be as fast as the fall.