What’s Behind Netflix’s Struggles?

[00:00:03] Welcome to Tech News Briefing. It's Tuesday, October 20th. I'm Danny Lewis for The Wall Street Journal. Streaming has taken over how Hollywood does business, but the company that kickstarted the transformation of the entertainment industry, Netflix, is struggling. Last week, the company cut 6% of its staff, about 1,000 people, with content and film executives shown the door. Its stock has taken a hit, too. It's down about 40% from this time last year.

[00:00:30] And to top it all off, Netflix is set to release its latest quarterly earnings later today. Here now to discuss what's happening at Netflix and what it means for the streaming giant's future is WSJ Deputy Media Editor Jessica Tunkel. Jessica, this is Netflix, the company behind Stranger Things, Bridgerton, Squid Game. What's going on here? I mean, it really seems like Netflix, which has long been the 800-pound gorilla in the streaming world, is admitting it has a content problem, right?

[00:01:00] It has a programming issue. It is replacing its top content talent. It's the executives that were in charge of movies and shows, bringing in new people, and having layoffs, which it hasn't done since 2022. Well, Netflix did try to buy parts of Warner Brothers Discovery earlier this year before it was outbid by David Ellison's Paramount. How much of Netflix's current struggles are a result of that deal going south?

[00:01:26] You know, I think that the bid for Warner's studio and streaming assets, it was a sign of weakness to investors, right? Investors saw that and said, wait, you've always said you are a builder, not a buyer. And now you're looking to make a pretty big acquisition. Does this mean you need it? And it spooked folks. And the stock last time I checked was down more than 40% over the past year.

[00:01:54] And how much has this issue with its content been playing out for, you know, their subscriber data? Growth is slowing overall. And the company has admitted that, that growth is slowing. The other big issue, and, you know, just to back up, Netflix is very metrics-oriented. They've always been focused on that. And one thing that they look at is what they call subscriber engagement, which is the amount of time that subscribers are actually spending watching their shows and movies.

[00:02:21] And that has been on a decline this year. And depending on how you measure it, you could say it's getting better. But we know from our sources that that has been a source of concern. And they're talking about doing all these new things. We were first to report that they were looking at bundling with NBCU's Peacock as a way to, like, address this issue.

[00:02:43] They've also discussed doing, like, live channels on their service, kind of like what Tubi does or Pluto TV, just to get people on the platform more. Two major casualties of these layoffs were Chief Content Officer Bella Bajaria and Film Chief Dan Lin. Why were they both let go? You know, I think it was this realization that they have a programming problem. I mean, Netflix has not had a hit this year. Stranger Things is over.

[00:03:12] Squid Game is over. Bridger 10 continues, but they need continuous hits. So I think this is an admission that they need to refresh the executives involved, whether that's true or not. I mean, I don't know. Some people would argue these are the scapegoats. They were just doing what they were told to do. But, you know, I think it's their way of saying we're starting over. We're going to start over. And so what would starting over at this point mean for Netflix's future?

[00:03:39] So I think what you're going to hear Netflix talk about at earnings is kind of a refocus on the core. You know, in the past five years, they've been trying to do more with games. They have gotten into video podcasts recently, doing more with creators. I'm not saying that they're going to abandon those efforts, but I do think that they're going to say, we want to really focus on our movies and shows because that's what delights our subscribers. And we want to make sure that we keep them happy.

[00:04:08] If you're a Netflix subscriber, what's been your experience with its shows and movies lately? Let us know in the Spotify comments. Coming up, is Netflix's technology playing a role in its slump? That's after the break. Welcome back.

[00:04:33] We've been talking about Netflix as a content company, but it's also a tech company where its recommendation algorithm is just as valued as the shows and movies it serves up. Jessica, talk to me about that algorithm and how the way the company has used it has changed over time. Well, I think what's funny is that at Netflix, you've sort of had these two parties. You have the tech folks and then you have the content folks.

[00:04:54] And there's always been a tension around do we let the algorithm decide what shows and movies we serve to subscribers when they turn on the service? And historically, you just let the algorithm do it. You can't promote something because the star of it really wants it to get more promotion. You want to please someone in Hollywood. You have to listen to the algorithm.

[00:05:16] But we have heard in recent weeks and months they have done more to kind of override that and promote either games or video podcasts and increasingly shows and movies as well. Is that why they're struggling? I don't think that's why they're struggling, no. Well, I mean, that's a great question. I think there are people at Netflix that would say, oh, it's our user interface.

[00:05:44] You know, they did relaunch their user interface a little over a year ago now. I think there are people on the programming side who have said that's the problem. People can't find what they want to watch. But if you look at the shows and movies, you could also argue like, but you haven't had any really standout hits for the past several months. So what's their thinking now as they're starting to, you know, reorient for whatever their new strategy is going forward? Well, I think we'll have to wait and see.

[00:06:09] Netflix just hired Peter Rice, a seasoned executive from Fox and later Disney. And by hiring him, they're saying, hey, this is someone who's been doing this for a long time. He's seasoned. He's experienced. He knows what people like. We're putting him in charge and he's going to make a lot of these decisions going forward. You talked about how Netflix has been expanding into new areas like live sports, video games, podcasts. Why are they doing that and how is it going?

[00:06:37] Live sports, they would say, is doing well. The thing about live sports is that it doesn't help with engagement, right? You might have a lot of people come to Netflix to watch a football game or watch WWE or watch a soccer game, but they're not going to necessarily stay on the service. They're going to come for that and then they might go do some other things. But it's good attention, right? It gets a lot of buzz. The gaming initiative has not gone as well. It has been five years. They have not had a breakout game.

[00:07:08] They've closed down some of the gaming studios that they've bought. So I do wonder at what point they just decide, let's just cut bait on this initiative. I think the podcast initiative is just too early to tell how well it's doing. I don't know if people go to Netflix and play podcasts in the background while they're cooking dinner, but I think it's too early to tell. And I don't think that is a huge part of their budget, to be fair. Netflix is set to report earnings today after the bell.

[00:07:37] What do you expect those to look like? Netflix has been pretty clear that they will be talking about slower growth. I do expect growth. But we're not seeing the double-digit percentage growth that we've seen from this company and that investors have come to expect. Part of that is that it's so big, right? Most people in the United States have a subscription to Netflix, so there's not so much room to grow. I do expect that they're going to talk a lot about the international markets and where they're seeing growth.

[00:08:05] And I think that they'll talk about this idea of, like, coming back to the core. I also expect they will emphasize that the forecast that they've given for the year, that they're maintaining that forecast, which is good news for investors. That was WSJ Deputy Media Editor Jessica Tunkel. And that's it for Tech News Briefing. If you're a listener on Spotify, be sure to leave us a comment. Today's show was produced by me, the supervising producer Katie Ferguson. I'm Danny Lewis for The Wall Street Journal.

[00:08:35] We'll be back tomorrow with a new episode. Thanks for listening.