Entertainment

How the supply chain is adding to Netflix’s troubles

The streaming service has been struggling to add new subscribers. One reason its growth has stalled: slowing smart TV sales.

Man in front of TVs

Some of Netflix’s current struggles can be attributed to a slowdown of the smart TV market.

Photo: Peter Cade/Getty Images

It’s not just hardware companies that are struggling with ongoing supply chain shortages. Rising prices and empty shelves have also started to impact streaming services, including industry leader Netflix.

Netflix co-CEO Ted Sarandos called out smart TV availability constraints as one of the reasons behind the company’s disastrous Q1 results. During the company’s earnings call, Sarandos declared it part of “a bunch of macro factors” that resulted in an account growth slowdown. A closer look at the data reveals that Netflix’s North America business appears to be uniquely impacted by supply chain issues, which experts agree won’t get better any time soon.

Subscriber growth ‘heavily correlated’ to smart TV adoption

Netflix lost 200,000 subscribers last quarter, and the company is forecasting a loss of a whopping 2 million in Q2. There are many reasons for those losses, including increased competition from services like Disney+ and HBO Max, the company’s decision to pull out of Russia and inflationary pressures. However, at least in part, Netflix’s growth also has become a victim of supply chain shortages that until now have primarily impacted hardware companies.

“The pace of growth into our underlying addressable market (broadband homes) is partly dependent on factors we don’t directly control, like the uptake of connected TVs (since the majority of our viewing is on TVs), the adoption of on-demand entertainment, and data costs,” the company noted in its Q1 letter to shareholders, which predicted that these factors will improve “over time.”

Parks Associates research director Paul Erickson agreed that smart TV sales are having some impact on the streaming business. “We know from our data that smart TVs are the most penetrated and most-used device in U.S. homes for streaming video consumption, present in 60% of broadband households,” Erickson told Protocol. “Supply constraints affecting that market would certainly cause ripple effects in overall subscription growth, as smart TVs are now the most significant point of video aggregation and consumption in U.S. households today.”

How much of Netflix’s current struggles can be directly attributed to a slowdown of the smart TV market is difficult to discern, but available data strongly suggests there is a link. North American smart TV sales increased by 10.8 million from 2019 to 2020, according to data market research company Omdia shared with Protocol. The next year, sales fell by 2 million.

Similarly, Netflix saw its subscriber numbers skyrocket during the early months of the pandemic. After adding around 3 million subscribers in North America in 2019, the company gained 6.3 million in 2020. In 2021, it added just 1.3 million.

“Smart TV penetration growth has slowed dramatically, with Netflix sub growth heavily correlated to the growth in smart TV adoption,” observed LightShed analyst Rich Greenfield. “Not only did smart TV penetration benefit from a COVID pull-forward, but it is now being pressured by supply issues including a resurgence of COVID in China.”

TV prices have been declining for decades — until 2021

Component shortages and shipping delays have especially impacted Chinese manufacturers like TCL and Hisense, which are known for budget-priced TV sets. “There's been a shortage of panels, and it's been much more expensive to ship televisions,” said Roku CEO Anthony Wood during an investor call earlier this year. Roku works closely with Chinese companies like TCL, and has observed their struggles firsthand. “The result of all that is TV prices have gone up a lot for consumers, and that's reduced demand for TVs,” Wood said.

Korean companies like Samsung and LG are more vertically integrated, making it easier for them to get access to the components necessary to build TVs. The two companies have also seen less of an impact from COVID-related shutdowns, allowing them to sell more TVs than their competitors. Both LG and Samsung are known for higher-priced models, which has driven up the price consumers have to pay for a new TV set.

The amount of money consumers had to shell out for TVs has been on the decline for decades. Between 2015 and 2020, the average purchase price of a TV declined by around 60%, according to Bureau of Labor Statistics Consumer Price Index data. In 2021, the price went up by 5.9% — the highest such increase in the past 70 years.

While this is based on the average price consumers pay to take home a new TV, it hides the fact that many consumers may have opted for cheaper, smaller or less capable models to deal with last year’s sticker shock. Prices for higher-end TVs spiked by as much as 30% in 2021, according to The NPD Group.

Industry insiders don’t expect the situation to get better any time soon. Roku warned investors that it expects TV sales to remain below pre-COVID levels this year, which will have an impact on the entire streaming industry. “The elevated pricing of new TVs is causing the overall size of the market in terms of the units sold to be down,” warned Roku CFO Steve Louden during the company’s most recent earnings call. “That's definitely a headwind for the industry as well as our TV partners.”

A bright spot for Netflix and the TV industry: Asia

The constraints aren’t affecting every streaming company equally. Roku, which runs its own ad-supported service, can at least partially make up for lower TV sales with its streaming players. Newer market entrants like Disney+ still have a larger untapped market among existing smart TV owners, allowing them to stay on a growth trajectory.

Netflix, on the other hand, has been plateauing in North America, where it already has 75 million paying customers. With little room for growth left, any change around the margin can turn subscriber gains into losses. In a way, the company finds itself in a similar situation as the big cable companies a few years back, when analysts were combing over metrics like household formation to discern the real impact of early cord cutting. Not looking to repeat that industry’s mistakes, Netflix is now eyeing other ways to return to growth, including a crackdown on password sharing and an expansion into gaming, combined with aggressive cost-cutting.

The good news for Netflix is that the company still has lots of room to grow in other markets, including Asia. The company added 1 million subscribers in the Asia-Pacific region in Q1 while losing subscribers everywhere else in the world. Excluding China, where Netflix is not present, Asia also happens to be among the regions least impacted by TV supply chain shortages. While global smart TV sales declined by 1% from 2020 to 2021, they were up by 6.6% in Asia excluding China, according to Omdia.

In other words: A global crisis that continues to affect the consumer electronics industry may require a global answer from entertainment companies like Netflix.

Note: Protocol is owned by Axel Springer, whose chairman and chief executive officer, Mathias Döpfner, is on the board of Netflix.

Enterprise

Why foundation models in AI need to be released responsibly

Foundation models like GPT-3 and DALL-E are changing AI forever. We urgently need to develop community norms that guarantee research access and help guide the future of AI responsibly.

Releasing new foundation models doesn’t have to be an all or nothing proposition.

Illustration: sorbetto/DigitalVision Vectors

Percy Liang is director of the Center for Research on Foundation Models, a faculty affiliate at the Stanford Institute for Human-Centered AI and an associate professor of Computer Science at Stanford University.

Humans are not very good at forecasting the future, especially when it comes to technology.

Keep Reading Show less
Percy Liang
Percy Liang is Director of the Center for Research on Foundation Models, a Faculty Affiliate at the Stanford Institute for Human-Centered AI, and an Associate Professor of Computer Science at Stanford University.

Every day, millions of us press the “order” button on our favorite coffee store's mobile application: Our chosen brew will be on the counter when we arrive. It’s a personalized, seamless experience that we have all come to expect. What we don’t know is what’s happening behind the scenes. The mobile application is sourcing data from a database that stores information about each customer and what their favorite coffee drinks are. It is also leveraging event-streaming data in real time to ensure the ingredients for your personal coffee are in supply at your local store.

Applications like this power our daily lives, and if they can’t access massive amounts of data stored in a database as well as stream data “in motion” instantaneously, you — and millions of customers — won’t have these in-the-moment experiences.

Keep Reading Show less
Jennifer Goforth Gregory
Jennifer Goforth Gregory has worked in the B2B technology industry for over 20 years. As a freelance writer she writes for top technology brands, including IBM, HPE, Adobe, AT&T, Verizon, Epson, Oracle, Intel and Square. She specializes in a wide range of technology, such as AI, IoT, cloud, cybersecurity, and CX. Jennifer also wrote a bestselling book The Freelance Content Marketing Writer to help other writers launch a high earning freelance business.
Climate

The West’s drought could bring about a data center reckoning

When it comes to water use, data centers are the tech industry’s secret water hogs — and they could soon come under increased scrutiny.

Lake Mead, North America's largest artificial reservoir, has dropped to about 1,052 feet above sea level, the lowest it's been since being filled in 1937.

Photo: Mario Tama/Getty Images

The West is parched, and getting more so by the day. Lake Mead — the country’s largest reservoir — is nearing “dead pool” levels, meaning it may soon be too low to flow downstream. The entirety of the Four Corners plus California is mired in megadrought.

Amid this desiccation, hundreds of the country’s data centers use vast amounts of water to hum along. Dozens cluster around major metro centers, including those with mandatory or voluntary water restrictions in place to curtail residential and agricultural use.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (ljenkins@protocol.com).

Workplace

Indeed is hiring 4,000 workers despite industry layoffs

Indeed’s new CPO, Priscilla Koranteng, spoke to Protocol about her first 100 days in the role and the changing nature of HR.

"[Y]ou are serving the people. And everything that's happening around us in the world is … impacting their professional lives."

Image: Protocol

Priscilla Koranteng's plans are ambitious. Koranteng, who was appointed chief people officer of Indeed in June, has already enhanced the company’s abortion travel policies and reinforced its goal to hire 4,000 people in 2022.

She’s joined the HR tech company in a time when many other tech companies are enacting layoffs and cutbacks, but said she sees this precarious time as an opportunity for growth companies to really get ahead. Koranteng, who comes from an HR and diversity VP role at Kellogg, is working on embedding her hybrid set of expertise in her new role at Indeed.

Keep Reading Show less
Amber Burton

Amber Burton (@amberbburton) is a reporter at Protocol. Previously, she covered personal finance and diversity in business at The Wall Street Journal. She earned an M.S. in Strategic Communications from Columbia University and B.A. in English and Journalism from Wake Forest University. She lives in North Carolina.

Climate

New Jersey could become an ocean energy hub

A first-in-the-nation bill would support wave and tidal energy as a way to meet the Garden State's climate goals.

Technological challenges mean wave and tidal power remain generally more expensive than their other renewable counterparts. But government support could help spur more innovation that brings down cost.

Photo: Jeremy Bishop via Unsplash

Move over, solar and wind. There’s a new kid on the renewable energy block: waves and tides.

Harnessing the ocean’s power is still in its early stages, but the industry is poised for a big legislative boost, with the potential for real investment down the line.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (ljenkins@protocol.com).

Latest Stories
Bulletins