Netflix, Facing Reality Check, Vows to Curb Its Profligate Ways

The shift comes as competition from an array of streaming rivals begins to take a toll, a new reality that was evident in first-quarter results announced Tuesday. The company lost subscribers for the first time in over a decade, and revenue grew at its slowest pace in years. Shares plunged 35%, the stock’s second-worst one-day decline ever, erasing $54 billion in market value.

“Well, it’s a bitch,” Netflix Chairman and Co-Chief Executive Reed Hastings said of the results while addressing employees in a town hall on Wednesday afternoon, according to people familiar with his remarks.

After churning out over 500 original programs last year, Netflix is looking to add fewer new titles, with a greater emphasis on quality, people familiar with the company’s strategy said. It is revamping production deals to limit its risk, and prioritizing programs with the biggest return, not the greatest reach, the people said. A key internal metric: the ratio of a program’s viewership to its budget.

“We should right-size budgets depending on what the creative dictates, and what the size of the audience is,” Bela Bajaria, the head of global TV for Netflix, said in a recent interview.

She said when Netflix first started making original programs it had no track record and had to make outsize bids to land “House of Cards” and other high-profile shows. “That was the cost of entry, the cost of doing business,” Ms. Bajaria said.

Netflix executives said the company expects to continue to grow spending on content to more than $20 billion this year while scrutinizing it more closely. Ms. Bajaria said that doesn’t mean the service will go cheap on production. “We’re always going to make great shows and have the amount of money needed for the creator’s vision,” she said.

As it looks to rein in costs, Netflix is also exploring new ways to boost revenue. In January, the company said it was raising prices in the U.S. and Canada. On Tuesday’s earnings call, Mr. Hastings said Netflix is exploring adding a lower-priced, ad-supported version of the service to court cost-conscious viewers. And, after blaming password-sharing for limiting its growth, Netflix says it is looking to “monetize” the practice.

The newfound focus on content costs is causing tensions with Hollywood’s producers and show runners, who have benefited from the streamer’s largess. Netflix’s tendency to give shows a quick hook when it believes they aren’t delivering a return is another sore spot with producers and creators. Some producers say Netflix needs to be more aware of its competitive environment, and factor in the programming rivals are launching when deciding when to release its own shows.

“If there is anything I would say is a fault of Netflix, it is that they are so insular. They may not see what’s going on outside their walls or they know and the hubris is so great they don’t care,” said Jeff Fierson, whose credits for Netflix include the movie “Sweet Girl” and the short-lived series “Daybreak.”

Mr. Fierson noted that “Daybreak”—a show about teens in a post-apocalyptic Los Angeles—made its debut close to the premiere of Disney+’s “The Mandalorian” and the debut of the Apple TV+ streaming service.

Warning sign

Netflix still leads the pack in streaming video with more than 220 million subscribers. But its recent turbulence has rattled Wall Street, causing investors to question how big the pot of gold is in the streaming wars. Shares in Paramount Global, which operates the Paramount+ streaming service, fell 7% on Wednesday, while shares in Walt Disney Co., owner of Disney+, fell 5% and shares in Warner Bros. Discovery, owner of HBO Max, fell 5%.

Disney+, Netflix’s closest rival with 130 million subscribers globally, is starting to feel some pressure as well. The company launched a low-cost, ad-supported tier to boost subscribers. It is broadening beyond the “Star Wars” and “Marvel” programming that has anchored Disney+, hoping to reach new audiences and be better positioned to achieve its target of between 230 million and 260 million subscribers by the fall of 2024. The ABC show “Dancing with the Stars,” which appeals primarily to an older audience, will move exclusively to Disney+ starting this fall.

All streaming players are learning that adding new subscribers is getting much harder, especially in the mature U.S. market. Every service is under pressure to create a steady flow of new shows and movies to draw in new subscribers and retain existing ones. The hope is that every once in a while they’ll score a big hit like Netflix did with “Squid Game,” “Tiger King” and “Queen’s Gambit.”

Veteran media analyst Michael Nathanson, who has raised concerns about the prospects for major players in streaming, said consolidation that reduces the number of competitors might relieve some pressure, but “for the time being, this is a pretty capital-intensive business.”

Some producers and writers say they are frustrated by inconsistent guidance from streaming services, which are always looking for a new formula to attract more subscribers. “As creative people we are getting whipsawed. There is not a mission statement that sticks around for more than a couple of months,” said producer Mike Royce, whose credits include the Netflix reboot of “One Day at a Time.”

When Netflix first introduced original programming to its platform a decade ago, its pitch to creators was that there would be little interference from the “suits” and no worries about ratings. In recent years the company has spent hundreds of millions of dollars signing superstar producers including Shonda Rhimes and Ryan Murphy, setting off a talent arms race among Hollywood studios.

Now, the service has a never-ending conveyor belt of new content. Shows have a window of several weeks to find their audience or they are canceled, meaning they usually aren’t promoted on the home page and become harder for viewers to find. Netflix executives say the company’s cancellation rate is on par with that of rival streamers, and of broadcast and cable networks.

Producers say the short window for shows to prove themselves is unrealistic. A recent show that fell victim to a quick hook was “Cowboy Bebop,” a bounty-hunter drama based on a popular Japanese animated series. Netflix spent heavily on the show, betting it would appeal to the same audience that loved the hit show “Squid Game.”

The streaming giant was so confident it ordered a second season before the first one had even made its debut. But just five weeks after “Cowboy Bebop” premiered on Nov. 19, Netflix pulled the plug. It simply wasn’t gaining traction fast enough. The cancellation left the show’s producers dumbfounded, according to a person close to the show.

“We always take big risks and big swings and sometimes, you know, many times they work and sometimes they don’t,” Ms. Bajaria said of Netflix’s expensive misses. “It’s a creative endeavor and it’s not a science.”

Return on investment

Sometimes, even coming out of the gate strong isn’t enough. The sci-fi drama “Archive 81” landed in Netflix’s ranking of top-ten shows in the U.S. soon after its January debut, even reaching No. 1 briefly. Two months later it was canceled.

Shows that Netflix spent heavily on, and which aren’t resonating, will be canceled quickly. That was the case with last year’s sci-fi drama “Jupiter’s Legacy” and the spy series “Hit and Run,” which were each canceled after about a month on the service.

The holy grail for Netflix is to find shows like “Squid Game” that are inexpensive and yet become hits. “Virgin River,” at a cost of roughly $3 million per episode, is a relatively low-budget soap opera with no big stars, but has been a huge success for Netflix. That means it is more efficient than pop-culture hit “Bridgerton,” which costs more than three times as much, say people familiar with the streamer’s efficiency measurement.

Under-the-radar, relatively low-cost hits are necessary to balance out the costs for big-ticket programming such as the special-effects-filled show “Stranger Things,” whose new season has a per-episode cost of $30 million, according to people close to the show.

Netflix also places a high value on shows that appeal to less-frequent users of the service, who are the most in danger of canceling their subscription, compared with heavy users, company executives said.

Netflix is looking to lower its costs when licensing shows it doesn’t own from outside studios and production companies. One studio executive with multiple shows at the streamer said in some cases Netflix is looking to reduce budgets on new shows by as much as 25%.

In addition, Netflix is seeking to change the formula it uses to license content. Typically, Netflix pays a premium to outside suppliers above the cost of production in return for having long-term rights to a show or movie. That premium has usually been a percentage of a show’s budget ranging between 20% and as much as 35%.

Now Netflix is seeking to shift to a flat fee model for those premiums so they don’t rise if a show’s production budget goes up.

Netflix is also re-evaluating the big production contracts it has made to star producers to make shows exclusively for their service as the streamer’s results with such deals have been mixed, talent agents said.

Certain genres of programming have fallen out of favor at Netflix. The company has moved away from talk shows and musicals, after they failed to perform, executives said. By contrast, the company is investing in more documentaries and unscripted fare, which are cost-efficient and tend to perform well.

Plots and scripts

In Hollywood, Netflix has been known for giving creators a long leash. Now, the company expects to be more hands-on in the development of shows and movies, weighing in on scripts and plot points, company executives said.

Those practices are standard at traditional networks and studios. “Having more development is an evolution of the maturity of the business,” said Ms. Bajaria, who before joining Netflix in 2016 was a top executive at Comcast Corp.’s NBCUniversal.

Producers say Netflix is also lowering costs by reducing the number of episodes it orders for shows for their second and third seasons. The second season of the dark comedy “Russian Doll” has one less episode. The coming season of “Firefly Lane,” a drama about two lifelong friends, is likely to have two fewer than its first season, people close to the show said.

Ms. Bajaria said shorter episode orders are “always about the creative” and not economics.

Another area where Netflix is tinkering is scheduling. The streamer recently hired Andy Kubitz, a former ABC and CBS programming executive, to the newly created position of “director of programming and launch analytics.”

Netflix doesn’t plan on making any dramatic changes to its custom of releasing a season’s worth of episodes at once. Other streamers have opted for a more traditional approach of spreading out the release of episodes so they can build buzz, a strategy some producers wish Netflix would embrace.

“There are so few Netflix shows that get what [producer] David Kelley used to call water cooler treatment—you know, where he’d have an episode of ‘Ally McBeal’ and people would talk about it the next day,” said Marty Adelstein, chief executive of Tomorrow Studios. He predicted Netflix will eventually shift to a model of releasing three episodes at a time.

Ms. Bajaria said the company’s approach of allowing full-season binges is about customer freedom. “I still think that our members, by and large, want to watch what they want, as many as they want, when they want,” she said.

Write to Joe Flint at [email protected]