Hardware companies aren’t the only ones 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 smart TV availability constraints one of the reasons for the company’s disastrous first-quarter results. During the company’s earnings call, Sarandos said it was part of “a set of macro factors” that led to slower account growth. A closer look at the data reveals that Netflix’s business in North America appears to be solely affected by supply chain issues, which experts say won’t improve anytime soon.
Subscriber growth is ‘strongly correlated’ with smart TV adoption
Netflix lost 200,000 subscribers last quarter and the company expects a loss of 2 million subscribers in the second quarter. There are many reasons for the 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 has also fallen victim to supply chain shortages which, so far, have primarily affected hardware companies.
“The rate of growth in our underlying addressable market (broadband homes) depends in part on factors beyond our direct control, such as adoption of connected TVs (since the majority of our viewing is on TVs), adoption of on-demand TV entertainment and data costs,” the company noted in its first-quarter letter to shareholders, which predicted these factors would 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 used device in American homes for streaming video consumption, present in 60% of broadband homes,” Erickson told Protocol. “The supply constraints affecting this market would certainly have ripple effects on overall subscription growth, as smart TVs are now the most important point of aggregation and video consumption in American households today.”
It’s hard to discern the extent to which Netflix’s current struggles can be directly attributed to a slowdown in the smart TV market, but the available data strongly suggests a connection. Sales of smart TVs in North America grew by 10.8 million from 2019 to 2020, according to market research firm Omdia shared with Protocol. The following year, sales dropped by 2 million.
Similarly, Netflix saw its subscriber numbers skyrocket in 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 only added 1.3 million.
“Growth in smart TV penetration has slowed significantly, with Netflix’s undergrowth correlating strongly with growth in smart TV adoption,” observed Rich Greenfield, analyst at LightShed. “Not only has smart TV penetration benefited from a COVID surge, it is now under pressure from supply issues, including a resurgence of COVID in China.”
TV prices have been falling for decades – until 2021
Component shortages and shipping delays have particularly hit Chinese manufacturers like TCL and Hisense, which are known for their low-cost TVs. “There’s been a shortage of panels and it’s been a lot more expensive to ship TVs,” Roku CEO Anthony Wood said on an investor call earlier this year. Roku works closely with Chinese companies like TCL and has seen their struggles first hand. “The result of all of this is that TV prices have gone up a lot for consumers, and that’s reduced the demand for TVs,” Wood said.
Korean companies like Samsung and LG are more vertically integrated, giving them easier access to the components needed to build TVs. Both companies also saw less impact from COVID-related shutdowns, allowing them to sell more TVs than their competitors. LG and Samsung are known for their more expensive models, which has driven up the price consumers have to pay for a new TV.
The amount of money consumers have had to shell out for TVs has been falling for decades. Between 2015 and 2020, the average purchase price of a television decreased by about 60%, according to data from the Consumer Price Index from the Bureau of Labor Statistics. In 2021, the price increased by 5.9%, the largest such increase in the last 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 cope with the clash of last year’s stickers. Prices for high-end TVs have risen 30% in 2021, according to The NPD Group.
Industry insiders don’t expect the situation to improve anytime soon. Roku has warned investors that it expects TV sales to remain below pre-COVID levels this year, which will impact the entire streaming industry. “The high price of new TVs is causing the overall market size to decline in terms of units sold,” Roku chief financial officer Steve Louden warned during the company’s latest earnings call. “It’s definitely a headwind for the industry as well as our TV partners.”
A bright spot for Netflix and the TV industry: Asia
Constraints do not affect all streaming companies equally. Roku, which runs its own ad-supported service, can at least partially offset declining TV sales with its streaming players. New market entrants like Disney+ still have a larger untapped market among existing smart TV owners, keeping them on a growth trajectory.
Netflix, on the other hand, has plateaued in North America, where it already has 75 million paying customers. With little room for growth, any change around the margin can turn subscriber gains into losses. In a way, the company finds itself in a situation similar to that of the large cable companies a few years ago, when analysts looked at measures such as household formation to discern the real impact of the early cut. of the cord. Not looking to repeat the mistakes of this industry, Netflix is now considering other ways to return to growth, including a crackdown on password sharing and gaming expansion, combined with aggressive cost-cutting.
The good news for Netflix is that the company still has plenty of room for growth in other markets, especially in Asia. The company added 1 million subscribers in the Asia-Pacific region in the first quarter while losing subscribers everywhere else in the world. Excluding China, where Netflix does not have a presence, Asia also happens to be among the regions least affected by TV supply chain shortages. While global smart TV sales fell 1% between 2020 and 2021, they grew 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 response from entertainment companies like Netflix.
Note: Protocol is owned by Axel Springer, whose CEO, Mathias Döpfner, sits on Netflix’s board of directors.