2 Words Explain Why Netflix Just Announced an Unexpected and Controversial Change

This week, Netflix reported its first-quarter earnings. The numbers were basically good, but the real news came as Netflix told investors it was planning to make an unexpected and somewhat controversial change: It will no longer disclose how many subscribers it has starting in 2025.

To put that in context, subscriber growth has always been the way to measure a streaming service, mostly because it was the way streaming services wanted to be measured. For years, they focused on how many new people were signing up for their service, even if they weren't yet making a profit. Making content is expensive, but as long as you can get more people to pay to watch the content, you'll be fine. Or, at least, that's the argument.

Now, however, Netflix--which has more subscribers than any other streaming service, wants everyone to stop thinking about growing subscribers as the way to decide whether the company is successful. Here's how Netflix explained the change in its letter to shareholders:

As we've noted in previous letters, we're focused on revenue and operating margin as our primary financial metrics -- and engagement (i.e. time spent) as our best proxy for customer satisfaction. In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential. But now we're generating very substantial profit and free cash flow (FCF). We are also developing new revenue streams like advertising and our extra member feature, so memberships are just one component of our growth. In addition, as we've evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact. It's why we stopped providing quarterly paid membership guidance in 2023 and, starting next year with our Q1'25 earnings, we will stop reporting quarterly membership numbers and ARM.

It's kind of strange that the change comes after Netflix reported adding 9.3 million subscribers, for a total or 270 million. You would think that those are the kinds of numbers Netflix would want to keep talking about. 

There's an obvious reason for the change, which is that Netflix has pretty much signed up just about everyone who is ever going to pay for its service. If the company is measured by the number of new people who sign up, it's going to look pretty bleak. There just aren't that many people left to sign up.

The company knows it won't be able to keep talking about adding that many users forever--which explains why investors got nervous. If Netflix wants to stop talking about the numbers, it must think the numbers are going to be bad. 

It would be easy to miss the most important part of that paragraph--two words, right in the middle that say a lot about how Netflix thinks of its business and how it wants everyone else to think about it as well. "We've evolved." 

It's true that Netflix's business has evolved. I mean, most obviously, Netflix no longer mails DVDs to your home based on a list you enter into a website. Instead, you just select the movie or tv show you want, and watch it right on the website or app. For that, you pay somewhere between $6.99 a month, for its ad-supported tier, and $22.99 a month for its premium plan. 

Also, Netflix's business model has evolved. It now earns money from subscribers who add additional members, for example, and makes more money per user from its ad-supported tier, on top of the subscription fee. That revenue isn't as directly related to the raw number of people who have subscribed. 

Here's the thing--Netflix's business has changed, and it makes sense that it needs to rethink what matters. Also, it makes sense that the change is going to make investors nervous--Netflix is trying to redefine success because the old definition isn't going to look all that successful. 

It's actually a powerful lesson for every business--as your business changes, it's important to consider how you define success. That doesn't mean it won't be messy, and it doesn't mean some people won't push back, but ultimately, your job is to be very clear about what matters most, and how you measure that.