Has Netflix Peaked?
(Bloomberg Opinion) -- The world is beginning to reopen from Covid-19 lockdowns, and for the hours we do still spend at home in front of a screen there have never been so many streaming-TV options. Against this backdrop, the news that Netflix Inc. managed to add 4 million subscribers last quarter could be viewed as a cause for celebration. But it wasn’t — not by investors anyway.
Shares of Netflix sank 11% in after-hours trading following the company’s disclosure that the app’s number of net new members was 2 million short of its own forecast. Some analysts had been more optimistic than Netflix executives were, so the underachievement appeared to be an even bigger flop. What’s worse, the company predicts it will add just 1 million subscribers this period.
The shortfall points to how the streaming pioneer is naturally losing the ability to add so many customers. That’s especially true in the U.S. and Canada, where quarterly subscriber gains have slipped into the hundreds-of-thousands realm from the millions (Netflix projects the figure may even be flat in the current quarter). But the stock move was an overreaction. Maybe even the wrong reaction.
Those of us who still take part in the ancient ritual of prime-time cable-TV viewing may have seen commercials lately for Truebill, a service that says it helps users identify subscriptions they can cut back on to save money. In one ad, a finger swipes a smartphone screen and unsubscribes from Netflix. It’s funny because it’s probably the worst example, though Netflix’s sheer ubiquity makes it a useful illustration for advertising purposes. How many consumers would see a list of all the things they pay for and realistically think, “Ah, yes, I should cancel Netflix”? Not many.
My point is that lost in this obsessive focus on Netflix’s quarterly subscriber growth is its almost unshakable position as the foundational TV product for households that have cut the cord. The Covid-19 pandemic reaffirmed this, even as Walt Disney Co.’s Disney+ surpassed 100 million global customers (Netflix has 208 million) and other services launched. A key takeaway from Netflix’s quarterly letter to shareholders: Churn, or the number of subscribers ditching the app, was down from a year ago — even on the heels of its latest price increase. Netflix and its rivals have also all been reeling from the virus-induced shutdown of Hollywood productions last year, which the company has said would take its toll in the first half of 2021. Later this year, though, its content output will ramp right back up.
More important, Netflix is getting smarter about how to make money. It’s looking to engagement and retention patterns to drive careful pricing decisions to avoid having them backfire. And some users have reported on-screen prompts suggesting Netflix is trying to turn password moochers into paying customers. It also appears to be rethinking its release-every-episode-at-once strategy, spreading out the season 2 returns of its reality programs “The Circle” and “Too Hot to Handle” over several weeks. (Another idea I’ve put forth is to expand into consumer-products licensing. Reed Hastings, Netflix's co-founder and co-chief executive officer, said on Tuesday's earnings call that consumer products are an "obvious" profit opportunity to support the core streaming business.)
The stock selloff would’ve been understandable had Netflix backpedaled on its mic-drop announcement last quarter that it’s close to becoming and remaining a free-cash-flow-generating company and that it no longer needs to tap the debt markets to finance its day-to-day operations. Instead, Netflix reiterated this in Tuesday’s statement. It also said it’s beginning a $5 billion stock-buyback program.
Netflix has plenty of competition, including from other forms of entertainment and even the out-of-the-house activities we all can’t wait to resume once vaccines make it safe. But Netflix is unique in offering so much content without a catch — no ads, no confusing windowing deals or premium-viewing fees. As long as that’s the case, its strength going forward isn’t so much in adding viewers as it is in keeping them. For other apps that won’t be so easy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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