Emma McIntyre
When your company loses nearly a million subscriptions in a quarter – and that’s the good news, you know the bar is low.
And that’s where we are at with Netflix (NASDAQ:NFLX).
The streamer put out its latest earnings report this week which revealed it had lost 970,000 subscribers over the past quarter. The reason why that didn’t send Netflix (further) into a tailspin is because both the company and many analysts had pegged that loss closer to two million or more.
Again, low bar.
Still, it’s significant because it shows Netflix may be in the process of beginning to turn the tide sooner than expected. But questions do still remain as the streamer is not out of the woods just yet.
First as always, some background.
To be clear the earnings report is a win for Netflix which had dropped like a stone since its last time talking to the investment community. It also comes on the heels of a new deal with Microsoft to help them launch their ad tier. Combined – that has given investors confidence in the company and its strategy.
Although it’s important to caution shareholders that the company still has ways to go to return to form. And in many cases, that’s a reminder some shareholders need as there’s definitely a vocal group that didn’t want to accept this was even a situation that Netflix could end up in at all.
And that’s the point.
Netflix got here because it relied too heavily on its past success and in the process cut itself off from evolving with the space.
Case in point, the ad tier.
Netflix for years had resisted the ad tier saying it would never be an option, but now as it was hemorrhaging subscribers, its tune changed. That’s led to them embracing the concept because it’s one of their only viable means of survival.
However, the ad tier is not a fix-all and there’s a lot we don’t know about its implementation. For one, we don’t know the cost and we don’t know what will NOT be included.
Netflix disclosed as part of its presentation that it would likely have to restrict some of its content from the ad tier lower cost version. Presumably that content would be from its library of acquired content, much of which they have to redo their deals for given the addition of commercials.
Although regardless of how this nets out, the new option is only part of the solution.
Netflix also discussed some of its plans for cracking down on password sharing. One of those methods is being tested in Latin America where households can opt to pay $2.99 a month to add an account. It remains to be seen how that approach will resonate with subscribers… many of which are now deciding how many, if any, streaming services to subscribe to given fears of inflation.
A new report out of the UK also notes that in many cases people aren’t subscribing to a streaming service as an overall entertainment option anymore, but rather for specific shows.
That tracks.
Stranger Things did well for Netflix in the last quarter, and because it split the last season into two parts, some of that residual will help in the next quarter. It’s also a double-edged sword though as it shows how vulnerable Netflix is with its content.
Outside of The Crown which returns in November, it’s hard to point to many other big-name series on the horizon that carry this type of massive impact. You can look at networks like Disney+ and HBO Max and instantly know what they have upcoming, reducing the chance of a start/stop pattern of subscriptions.
One solution there is something that has worked for nearly all of Netflix’s rivals – a gradual rollout of content, which would help Netflix reduce how fast it burns through its originals. Netflix is unwilling to do that on their service outside of the two-batch method (where it splits a season in two).
The company has tried that twice so far this year with Ozark and Stranger Things – with it seemingly working better for Stranger Things. To that point, you can make the argument that based on Stranger Things’ success two batches may be enough and you don’t need to go weekly.
Although I think Stranger Things is an outlier.
What Netflix smartly did here was peg both batches to a major holiday – with part one coming near Memorial Day and part two dropping around the 4th of July. By leveraging the holidays Netflix had built in two periods where people are largely off work and can do a full binge (if they choose) and there’s “just” enough time for the show to not lose much momentum between the two dates.
That would be a harder feat to pull off in other windows and with other shows – especially ones that have less mainstream appeal, lesser name-value and where that weekly cadence would help build an audience.
Every solution being offered by Netflix here seems more a like half-measure one than a full measure one. While many analysts were optimistic after the earnings news, some agree that this is a short-term win and also cited concerns about Netflix’s spending as well, which takes us right back to the content conversation.
Programming aside, the churn problem also remains given that both the ad tier and password sharing pullback won’t take full effect for at least a year if not longer, which as one analyst correctly noted – “is a lifetime in streaming.”
The excitement around Netflix beating estimates is understandable and needed for the streaming landscape but it also needs to be put into perspective. Let’s see how Netflix does in the next few quarters and what it has on the radar for 2023 in terms of programming as that tells a larger story.
Or let’s at least wait for Netflix to have a consistent rise in stock price to get it closer to where it used to be – otherwise shareholders could be once again lulling themselves into a false sense of security.
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