Netflix’s subscriber growth stalled—and it’s bad news for Disney, HBO, and everyone else

Much like the climatic scene in the trailer for Murder Mystery—”the most watched Adam Sandler Netflix original film to date,” as Netflix’s Q2 shareholder letter boasts—the global streaming service’s growth has crashed.

Netflix had promised investors that it would add 5 million net new paid subscribers but instead it added only 2.7 million. But worse than that, although the shareholder letter asserts that U.S. paid subscriber growth was “essentially flat,” the company actually lost 126,000 subscribers last quarter. That’s the first time in Netflix’s history that it’s lost subscribers in its largest market.

The company cites that it lost more subscribers in regions where it raised prices (like, the United States), but it pinned the blame on its content that debuted between April and the end of June, saying it drove less growth in new subscribers than anticipated.

As is always the case with Netflix, almost any bad news prompts its skeptics to predict that its, um, House of Cards is about to collapse, while its most ardent defenders can find plenty of justifications to sweep it away as a mere stumble along the service’s path to total world domination.

I’ll admit that I have vacillated between these two poles, but today’s miss is actually extremely good news for Netflix. Here’s why.

1. If there was a price revolt, it puts rivals in a bind

Netflix raised prices from $11 to $13 a month on its standard plan in the United States, and it lost 0.2% of its subscriber base. That’s a blow Netflix can absorb, but it sends a signal to every other current and would-be rival: Your service is going to have to be better than Netflix and you have no pricing flexibility whatsoever.

If I were a WarnerMedia executive planning to price HBO Max at $17 a month, I’d be freaked out right now. As it is, only several million people have signed up for HBO as a streaming service at $15 a month. At $17, let’s say, that means WarnerMedia is valuing everything else it’s promising to add to HBO Max—its film catalog, TNT, TBS, Cartoon Network, and so forth—at $2 a month. Yikes! In the best case scenario, Warner destroys its legacy cable business as subscribers figure this out and embrace Max as a cheaper alternative. Or, consumers balk at the price and force Warner to confront the inherent contradiction in its business—that it can’t price HBO below what it charges cable and satellite operators—and ends up destroying its cable business all by itself. That leaves plan C: Give the stuff away to AT&T wireless customers and hope they don’t notice their exorbitant data fees.

Disney, with both Hulu and Disney+, is also boxed in by price. Most analysts have assumed that Disney+ at $6.99 a month is an introductory price and that it would rise over time as Disney built out a catalog. Anyone who thinks that people are going to spend the same amount of money they do on cable on streaming services is woefully mistaken. Disney could hike cable prices when those increases were buried in the cable bill. But now it’ll have to tell its customers directly it wants more money. That’s the thing about direct-to-consumer: There’s no middleman to blame.

Ad-supported services have it worse: Their experience is going to pale in comparison to an ad-free Netflix, and it’s hardly going to seem worth it against free, ad-supported streaming services. Being caught in the middle that way is going to doom them to being a market afterthought at best or more likely, a brief way station before the market shakes out into premium, ad-free services and free, ad-backed ones.

2.  Subscriber numbers are all that matters

Netflix has been a public company for 17 years. For almost two decades, then, Reed Hastings and company have educated investors that the number that matters more than any other is how many people are paying for its service each month.

That means that everyone who is now entering the game is going to be judged by this metric, the one that Netflix has drummed into Wall Street as the only thing that matters.

Think about it this way: In 2012, Facebook went public, the first social-media company to do so. The company (where Hastings served as a board member from 2011 until earlier this year) trained Wall Street that the vitality of a social-media company should be judged by its number of active users. Hey, would you believe it? Facebook had more of those than any of its rivals. When Twitter and then Snap went public, they both tried to shift investors’ focus to other metrics—and it has never worked.

This is the trap that Netflix has set for its rivals.

No one—not Hulu or Disney+ or Apple or HBO Max—is going to deliver 151.6 million global subscribers (or 60 million U.S.). Not anytime soon, and maybe never.

3. Netflix is sitting on two aces in the hole

Investors, like binge watchers, just want more Netflix. This is why there have been persistent rumors that the company is going to get into gaming and that it is going to sell ads. The company makes clear in its shareholder letter that neither of these things is going to happen. As for gaming, Netflix acknowledges three new initiatives: a Stranger Things mobile game, a game based on its forthcoming show Dark Crystal: Age of Resistance, and its partnership with Epic Games, maker of Fortnite. But then it hastens to add, “Like our other merchandising initiatives, these games are designed to build fandom for our titles and don’t signal a push into gaming as a new business for Netflix.” It was even more emphatic about the ad business. “When you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”

This stance about ads is admirable! Data-driven targeted advertising is an extremely high-margin business, albeit one that is increasingly toxic politically. It is the kind of thing that could rather quickly start to erase $12 billion in debt, let’s say, or fund any number of Martin Scorsese crime epics.

Netflix could pursue these new lines of business if market conditions change or it feels the need to compete against those free streaming services or the time consumers spend playing games. Remember all the times Steve Jobs said tablets would never work, or Apple wouldn’t get into the cellphone business? He arguably believed these statements until he didn’t. The same applies here to Netflix’s statements about gaming and advertising.

Here’s the thing: having a weapon and not using it can sometimes be even more powerful. Netflix having options—from the strength of having more than 150 million subscribers—is not good news for Disney, Warner, and everyone else. They haven’t even caught up to Netflix’s 12-year head start in streaming. If the company changed the game on them now, by the time they catch up it will almost certainly be too late.