Dwayne Johnson and Ryan Reynolds in Red Notice. Photo / Netflix
At the time, it was hailed as a seismic moment for the movie industry. After years of fighting to be taken seriously, Netflix triumphed on the most traditional field of them all.
Its drama, Roma, secured a best director Oscar for Alfonso Cuaron and the streaming service walked away with three Academy Awards in what was regarded as a tipping point in the streaming industry's dominance over the world of entertainment.
Yet fast forward three years and that Oscar triumph in 2019 is at risk of becoming the peak of Netflix's success as its streaming story hurtles towards a possibly unhappy ending.
The company behind global hit shows such as The Crown and Squid Game is in deep trouble.
Subscriber numbers have fallen by 200,000 in just three months with the fear of more woe to come. It is losing billions of dollars a year because many viewers watch shows for free using a friend's password. And in some quarters, its shows have become a byword for liberal excess.
Elon Musk pinned the problems at the company on a "woke mind virus" that had made shows "unwatchable" as he mounted a veiled attack on the anti-climate change movie Don't Look Up, as well as Netflix's decision to introduce non-binary character into Star Trek Discovery, and its commission of Seaspiracy, the documentary criticising commercial fishing that came under fire for misleading claims.
Netflix Shares Crater 20% After Company Reports it Lost Subscribers For the First Time in More Than 10 Years https://t.co/rH2AklZJsl
— Slashdot (@slashdot) April 19, 2022
The concerns do not end there. Critics have taken aim at its failure to produce enough hit shows for its 222 million subscribers after critics panned the US$200m (NZ$293m) action movie Red Notice starring Dwayne 'The Rock' Johnson.
A US$300m deal with the Glee producer Ryan Murphy has also proven ill-judged after his series named Hollywood was pelted with bad reviews.
Those mistakes have been worsened by the Californian-based company's failure to grapple with the army of competitors in the shape of Disney+, Peacock, Paramount+, Prime Video and Apple TV+ that have curtailed Netflix's first mover advantage by splashing hundreds of millions on exclusive content to eat into its subscriber base.
With the cost-of-living crisis forcing viewers to cut back their subscriptions and the password-sharing epidemic causing Netflix to lose billions of pounds of income, the foundations of its business model that was once all-powerful now seem increasingly flimsy.
Subscribers are forecast to drop by another two million in the second quarter, but founder Reed Hastings is hoping a once-taboo tilt towards advertising will bring the kind of stability that inspires a rebound.
After claiming two years ago that Netflix should be a "safe respite" from the "controversy around exploiting users with advertising", his readiness to depart from its subscription philosophy carries a whiff of desperation that suggests he is struggling for answers.
Getting a grip of spending might deliver quicker results. Considering its debts stretch to around US$15 billion, Netflix loves to spray money around - in the words of veteran Hollywood reporter Richard Rushfield, "like a pharaoh on shore leave".
His newsletter, The Ankler, chronicles the streamer's profligacy. "They created the dominant sector in entertainment out of nothing and built a business with 200 million subscribers. All incredible. The only problem is if you have a business of 200 million subscribers and you're spending like a business of one billion subscribers," Rushfield says. "Sooner or later, you're going to run into some problems."
Some financial decisions appear to have been poor ones, such as the deal with writer, producer and director Murphy in 2018 - the largest in television history.
Murphy had an impressive track record prior to Netflix, with shows including American Horror Story and American Crime Story. Since arriving at the streaming service, however, he has been responsible for producing the lacklustre Ratched, a sequel to One Flew Over The Cuckoo's Nest; and The Politician, a show featuring Gwyneth Paltrow that critics panned.
Meanwhile, Netflix has shelled out an eight-figure sum to make shows with the Duke and Duchess of Sussex. Questions remain over how much of a draw the couple will be for Netflix viewers.
A better bet seems to be the US$100m 'golden handcuffs' deal with Bridgerton executive producer Shonda Rhimes, given the popularity of the Regency-era show.
Yet Rhimes' other launch this year, Inventing Anna, was lightweight. Instead, critics raved about a rival tale of a female scammer: The Dropout, which is available on Disney+.
The boom of rival streaming services such as Disney+ is part of the problem. Its slate is small when compared to Netflix's vast library, but it has few duds. Industry research firm Ampere Analysis expects the company behind the Marvel Universe to become the preeminent streamer by 2024, boasting 295m subscribers compared to 279m for Netflix.
Apple TV+ also poses a greater commercial threat after hitting its creative stride with what are considered two of the best dramas of recent years: Pachinko and Severance.
While the iPhone maker keeps its progress a closely guarded secret, Digital TV Research expects its subscriber numbers to reach 36m by 2026 - just three years after launching.
Streamers with more modest ambitions can eat away at rivals' market share without worrying about becoming a dominant force. But such moves are just as threatening to Netflix, whose debt-fuelled model is built on being the leader of the pack.
What is worrying for Hastings is that Netflix's fall follows a popularity surge. The pandemic was good for the streamer. Existing subscribers watched a lot more when stuck at home - gawping at Tiger King, bingeing The Crown or ploughing through Emily in Paris - and more elderly viewers expanded their television horizons from traditional broadcast by trying a streaming service. Around 16m people created accounts at the height of the pandemic - growth that nearly doubled the number of new sign-ups at the end of 2019.
People joked they had "completed Netflix". With such a vast library, the streamer had always been more filler than killer. But strip away the prestige series, the splashy true-crime documentaries and the shows people had always wanted but never found time to watch - and what is now left?
A lot of similar content is the answer. In October, for instance, Netflix released Baking Impossible, a series in which contestants build things out of cake, including a mini-golf course and a robot. Five months later, it launched Is It Cake?, a series produced from the same mould. It has been received as lazy and uninspired compared to what was offered up by Disney+ and Apple.
Lockdown chaos hardly helped the company, with temperature checks and strict social distancing guidelines making filming difficult. Managing Covid risks added as much as 30 per cent to budgets during the crisis, producers said at the time.
"I know the soaps are going back and they are socially distancing but that doesn't work with high-end series. Looking at big crowd scenes, big stunt scenes, all of these require very methodical thought and planning," Ben Holt, Netflix's UK director of physical production, told the Financial Times in 2020.
"Wearing PPE all the time doesn't quite work unless you are filming a medical drama."
In an indication of the level of competition over content, Apple last month became the first streaming service to win best picture at the Oscars, for CODA. This was a bitter pill for Netflix to swallow.
The company has nakedly pursued the best picture win for years, pouring millions into campaigns for The Irishman, Roma and Mank. But it turns out even a Martin Scorsese epic or beautiful black-and-white film-making can't make Academy voters choose Netflix.
Throwing money at the opposite end of the market hasn't paid off either as judged by comedy action flop Red Notice, which soaked up a US$200m budget.
Meanwhile, industry figures have even questioned whether Apple's success at the Academy Awards was a fair reflection of the streaming industry's strength.
Tim Richards, chief executive of Vue cinemas, said the achievement was symptomatic of cinemas being closed during the pandemic rather than streamers' superior commissioning strategy.
The choice facing the Oscars, Baftas and other global award ceremonies was "significantly more limited" this year because of the cinema shut down, he said, adding: "That's why you saw a disproportionate number of subscription films up for awards."
While Netflix is capable of coming up with the goods - as highlighted by the final season of acclaimed series Better Call Saul this week - there remains a feeling in the industry that the commissioners have lost their touch.
One television executive questioned whether the streamer had become a slave to its algorithm that produces data about what shows are most popular with its subscribers, but fails to identify upcoming hits in the same way a commissioner can.
Squid Game, for instance, became a stealth hit last year in spite of a lack of marketing. The Korean show's popularity took the streamer by surprise, evident by it telling subscribers the success was "mind-boggling".
"They commission willy nilly and there is less rigour," the executive adds.
"In the glory days of the American networks or Alan Yentob in his prime at the BBC, they reflected the commissioner's personalities and their interests. There is no sense of that at the streamers. There is a sense that the algorithm has taken over."
Warning signs for Netflix have been growing for some time.
Investors wiped about US$25b off its market value last April when shares plunged 11 per cent in response to slowing subscriber growth. And in January, the streaming behemoth posted its slowest annual growth since 2015 and predicted its worst start to a new year for 13 years due to a "Covid overhang".
The latest wobble caused it to shed another US$49b on New York's Nasdaq exchange, after Hastings lamented how the "big Covid boost to streaming had obscured the picture until recently".
That has prompted Netflix to try to shift its measure of success away from subscribers and towards revenue growth, which rose 9 per cent to US$7.8b year-on-year in the first quarter following its decision to increase prices. A near 10 per cent rise is also expected in the following three months.
There is also the question of how far Netflix can realistically use price rises to counter falling subscriber numbers, considering the ease of cancelling a streaming subscription.
Mark Mulligan of Midia Research says discretionary entertainment spend will be one of the earliest victims as viewers grapple with the soaring cost of fuel, energy and grocery bills.
"Video subscriptions inadvertently made themselves an easy target," he adds.
"The sheer volume of choice and competition, combined with rolling monthly subscriptions, make it all too easy to drop one subscription without seriously denting your overall video experience."
Meanwhile, Netflix has its own inflation conundrum.
The wave of streaming rivals wanting to fill their services with exclusive shows has caused the cost of talent, studio space and production staff to rise rapidly.
If passing costs down to consumers becomes unpalatable then the streamer may be forced to take a hit on profits - a move likely to irk shareholders even further. The stock fell more than 30 per cent on Wednesday.
Hastings has pinpointed password sharing as a line of attack the company can pursue to shore up subscribers and pull in extra income.
Netflix could bring in as much as US$14b by converting the 100m households that use shared passwords. Yet enforcing the rules is a fine balancing act that risks irritating existing subscribers and prompting more cancellations if the streamer is too aggressive.
Tom Harrington, of Enders Analysis, says Netflix's attempts to "dismantle the culture of free that currently surrounds the brand" can "only target the low-hanging fruit, so as not to risk inflaming subscriber relations".
The bigger question is whether Hastings' bet on shifting to an advertising-funded model can bring the kind of security Netflix needs to protect its dominant position.
According to Neil Campling at Mirabaud Equity Research, the pivot towards a lower tier ad-funded model was an "admission that the latest price increase was a mistake", but believes it could go some way to balancing out the move.
Global brands such as Nike or Unilever may be attracted by the prospect of paying a single fee for an advertising blitz that reaches all of Netflix's global subscribers.
The risk, however, is that Netflix simply cannibalises its own subscriber base as viewers decide to pay less and view ads. That could force Hastings into a more complicated system of hiving off the best shows for more expensive packages, which risks even more cancellations.
Netflix has flirted with diversifying the business by snapping up video games studios - and dished out £500m (about NZ$964m) on Roald Dahl's catalogue to create a steady stream of hits, following Disney's example with Marvel Universe. Yet Campling believes Hastings would be better off buying a rival such as Paramount+ to give an extra brand that offers lower-priced tiers of content.
How Hastings moves forward marks the biggest challenge yet for Netflix, whose growing dominance in the market accelerated the fall of video rental business Blockbuster around a decade ago. After losing subscribers for the first time in ten years, the video streaming app appears at the mercy of its rivals.
Can Netflix escape its own Blockbuster moment? As his Oscar glory fades into history, that is one cliff hanger Hastings will be desperate to avoid.
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