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 5.7% — 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.

Correction: This story has been updated to correct the price increase of TVs in 2021. This story was updated July 28, 2022.

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