New Data Shows Netflix’s Continued Challenges As Next Earnings Loom Large (NASDAQ:NFLX)

It may get worse before it gets better.

For a company that has seen its stock has drop like a stone the last few months that’s not exactly what investors probably want to hear …but it’s the truth.

Then again for Netflix (NASDAQ:NFLX), the truth has always been somewhat “fluid.” And I’m not necessarily saying that as a bad thing, that’s all part of being a disruptor. It’s more the idea that there is a better way of doing things that drives them to change what is accepted as fact.

However there comes a point when you have to decide would you rather be a disruptor or stay competitive in business?

Two new sets of data released this week show while Netflix may want to think it can do both – times have changed and with a new round of earnings upcoming, it would be wise to acknowledge more work could be done.

So what does the data show and how could it impact the company’s thinking?

First as always, some background.

For a company that broke through walls to get to where they are and really define a medium, to see this type of freefall over the last quarter has been nothing short of astounding. The reasons are numerous with overspending being right near the top.

Following their last earnings report, which showed a steep loss in subscribers, Netflix’s executive team quickly pledged to correct the root causes. And in that time since we have seen Netflix begin to make good on that promise – it has started to curb spending and it has looked to stop the bleeding by cracking down on password sharing and adding an ad tier option (all things its team vowed never to do).

But there’s the downside to all of that as well.

The spending curb led to the loss of hundreds of jobs, the password decision may end up costing them customers and the ad tier is still months away from fruition. In fact, the whole ad tier startup process has really only spotlighted how ill prepared Netflix was to embark on this new direction.

And that’s part of the point. Netflix has been stuck in its ways for years and is only now making changes because it has been left with no options. However, it’s only a half measure solution because these are, for now cosmetic changes, designed for a short-term boost. Long term full measure solutions still need to be worked out and that could involve deeper DNA changes.

Netflix rose to success by doing what nobody else was doing, but now it is in a position where its rivals are succeeding by doing what THEY aren’t doing.

For example, Netflix has been anti-live events for years because it didn’t “fit” their model. Now nearly all of their competitors have a robust live offering, mostly revolving around sports.

It was also recently rumored that because of the success of its F1 docu-series, Netflix was looking to acquire streaming rights to F1 races – but was outbid by Disney (NYSE:DIS).

The F1 situation is actually a larger problem for streaming in general because what’s happened there is that sports rights have gotten so competitive the price tag has gotten ridiculously high.

Disney may have won the rights but it is paying 1500% more for that right. That’s not a typo – Disney was paying $5 million a year and now is paying in the neighborhood of $75 million to $90 million.

That’s where we’ve gotten to now.

And that’s just F1 … now factor in the costs of all the bigger sports leagues and those rights.

That’s all money for content that is now helping to fuel every mainstream streaming company that is NOT Netflix. Yes Netflix bidding likely drove the price up, but ultimately it’s Disney and it is willing to pay above market for what it feels is valuable IP.

Netflix has also been very anti-traditional rollouts for content.

The company created the binge-culture and it doesn’t feel the need to abandon it, even though the market is showing subscribers are game for a switch.

Many of the other streamers have started a new model where they release two or three episodes at the start and then move to weekly. The approach allows for not only a continuation of watercooler conversation but a reason to keep the service active for a longer period of time.

What Disney has done so exceptionally well is that it has its next big series queued up to go just weeks after the last one wraps. It’s very much a page out of the HBO (NYSE:WBD) playbook which it has used to great success on Sunday nights for decades.

But Netflix doesn’t want to change its methods because according to its internal data its audiences like the binge approach. Now yes it has changed slightly and begun releasing shows in two batches spread further apart, but while many want to say that’s a sign the company is changing … it’s not.

The decision to spilt its shows into two seasons is mostly an awards play that allows Netflix to double-dip.

Stranger Things is a great example as it premiered the first batch of episodes over Memorial Day weekend and the final two will premiere just prior to the 4^th of July. And since the Emmys cut off was end of May, that allows Netflix to submit the same season across two Emmy voting periods … meaning some of the pressure to release a new season of Things is relieved because it is covered for both this and the next award cycle.

It is true it helps with the sustaining momentum aspect and it may keep subscribers engaged that extra month, but those are added benefits to the larger goal which has always been awards.

Those are just two examples and while there are more, I want to go back to the data because that seems to drive everything for Netflix and the like.

So let’s look at the data – and not the vague cherry-picked ones that Netflix and others like to tout.

Antenna this week put out a new report that shows Netflix subscribers are now more likely to quit in the first month than any other service. One of those reasons is how quickly subscribers can churn through content and their inability to have patience to wait for what’s next.

As I mentioned, this is something HBO’s been very good at avoiding. Look at its summer slate which opened with The Time Traveler’s Wife and now has moved to Westworld, which will eventually give way to Game Of Thrones’ spin-off House of the Dragons. That’s a clean and clear roadmap that encompasses the entire summer and into the new fall season.

It’s hard to look at Netflix and concretely know these are its beats for the next three months.

The Antenna report is then compounded by a Variety report that shows Netflix ranks last in perceived value – with HBO Max topping the list and Disney+ just behind in second.

The upshot to the report is that it also found despite that lack of perceived value, it is still the most “must-have” service. Yes, that’s a silver lining but it could also be a temporary one as compared to Variety’s report from a year ago, Netflix may still be the leader, but it dropped 10% percent while both HBO Max and Disney made gains (by 6% and 5% respectively).

Netflix also slipped 10% in customer satisfaction. While HBO Max and Disney+ stayed around the same in those rankings, it is worth noting Apple TV+ leaped 14%.

It all tracks with the larger picture of Netflix’s dominance beginning to dissipate.

Netflix is trying to change that but with the perception that July’s earnings report could bring additional bad news, the streamer needs to take steps now to control the narrative. If it doesn’t and the next quarter recap does show more doom and gloom, that hole it has been digging itself into will only grow … and so will the downward spiral investors thought may never happen.