Netflix will cease to provide membership guidance in a conclusive sign that the world’s biggest streamer has pivoted after a torrid start to 2022 and is doubling down on revenue as its prime metric.
The company delivered a stirring Q3 earnings report that saw global membership exceed forecasts to climb by 2.41m to 223.09m. On top of that it beat revenue and earnings forecasts, sending the stock price up by 14% in after-hours trading.
Bullish executives outlined a roadmap to fiscal responsibility and increased profitability during the traditional video interview with analysts on Tuesday (October 18).
There is the imminent, ad-supported tier that many thought unthinkable until co-CEO Reed Hastings first spoke of it publicly in April, a plan to monetise password sharing, and a freeze on current $17bn annual content spend.
It was a session full of the kind of fast-talking, jargon-filled confident utterances Netflix’s C suite has shown many times before as top brass at the now cash-flow positive company highlighted a starry content roster, and reaffirmed that steaming and not theatrical releases are why people pay for the service.
Netflix’s Q3 earnings letter took a swipe at the streamer’s rivals, noting superior market share in video viewing and TV time in the US and UK. “Our competitors are investing heavily to drive subscribers and engagement,” the letter read, “but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 to $6 billion annual operating profit.”
It all seemed a far cry from the last two earnings reports, particularly Q1 in April, the company’s cruellest month in many a year when it announced a 200,000 net global subscriber drop – the first in a decade. That triggered a 60% market cap plunge, which in turn led to hundreds of staff lay-offs.
Fickle investors came to the crushing realisation that subscriber growth is not in fact a bottomless well, as they had believed for years. The penny also dropped at Netflix, where executives saw that membership was not the be-all-and-end-all and reassessed their priorities.
“[W]e’ve been increasingly focused on revenue as our primary top line metric.” Spencer Wang, vice-president, finance, told analysts in the video interview. “This is going to be even more important as we head into 2023 with different revenues streams like advertising and paid sharing, where membership growth is only one aspect of the revenue picture.” The company will continue to report on global and regional membership, but going forward will only provide guidance on revenue, operating income, operating margin, net income, earnings per share and fully diluted shares.
Fiscal prudence should keep Wall Street happy – analysts have made positive noises of late – and removes attention away from membership numbers. It’s a useful move at a time when other platforms build out their services and customers, facing high inflation and possibly a recession within the next 12 months, get pickier about which streamers they join. Received wisdom says customers on the whole are being conservative and choosing between two to three services.
To this end co-CEO Reed Hastings made references in April to an ad-supported tier. Six months later what was unthinkable even a year ago is about to happen as Netflix readies a November launch of its $6.99 Basic With Ads offering in the US, UK and 10 other countries. (Prices will be comparable outside the US.)
The 12 countries account for “well over” half of the streamer’s revenues, CFO Spencer Neumann told analysts, and these mature advertising markets are expected to bring in serious money.
COO Greg Peters outlined the ad-supported launch in a presentation to press last week and said the company does not expect significant plan switching, whereby a current subscriber of a more expensive ad-free tier migrates to the $6,.99 plan. “We’re not trying to steer our members to one plan or another,” said Peters. “We’re trying to take a pro-consumer approach and let them find the right plan for themselves.”
Peters added that Netflix’s “sprint” towards Basic With Ads will eventually bring in new members and expressed confidence the economics and revenue of the company will weather any switching. Executives believe it will lead to a “significant and incremental revenue and profit stream”, although Neumann added that he did not expect to see an impact until early into 2023.
Netflix is also taking steps to clamp down on illegal password sharing, which it has estimated is going on in around 100m households. Tuesday’s (October 18) earnings letter said that starting early next year Netflix will begin monetising password sharing. People euphemistically referred to as “borrowers” will get the option to transfer their profile into their own account, while “sharers” will be able to create sub-accounts for family and friends. The company did not outline price points but said it expects profile transfer to be a popular option in countries where it offers Basic With Ads.
Co-CEO Ted Sarandos told analysts he was feeling “better and better” about the $17bn annual content spend and said it would be revisited over time. The game now is gauging the level of impact per $1bn of spend and Sarandos noted that several titles in Q3 have already become some of the most-watched on the platform, among them Stranger Things S4, Monster: The Jeffrey Dahmer Story, South Korea’s Extraordinary Attorney Woo, and features like The Gray Man, and Purple Hearts.
It is Sarandos’s job in earnings season to talk up the content and he needed no excuse to name-check gleefully a handful of Q4 titles expected to make a splash in what is traditionally a rich season of content. They include The Watcher, The Crown S.5, a Witcher origins series, Guillermo del Toro’s Cabinet Of Curiosities, and Tim Burton’s TV directing debut, the Addams Family spin-off Wednesday.
Sarandos also resisted the idea of keeping a film like Glass Onion: A Knives Out Mystery in theatres longer than the stated one-week run in late November in the US, UK and other select markets. “We’re in the business of entertaining our members with Netflix movies on Netflix, so that’s where we focus all of our energy and most of our spend,” he said.
“Our films are always heavily featured in film festivals around the world because they’re in demand, made by the greatest filmmakers on the planet. For all those folks who can’t get to a city where a festival is, this one-week release is a way of creating access to the film and building buzz. I would look at this as another way to build anticipation for the film… ahead of its Netflix release. With one week of release in theatres, most people will see them on Netflix, just like they see all movies. Most people watch most movies at home.”
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