Netflix Turn It Around

Guess who’s adding subscribers again... Netflix! The streaming service posted a much better earnings report than expected (feared?), adding another 2.41 million subscribers, far better than the 1 million additions the company had forecast.

The share price gapped higher before running right into the 200 day moving average and paring some of those gains, yet still closed almost 13% up on the day:

Even though this was a better result than predicted, Spencer Neumann, Netflix’s chief financial officer, was in glass half-empty mode during the company’s earnings call.

“We’re still not growing as fast as we’d like. We are building momentum, we are pleased with our progress, but we know we still have a lot more work to do.”

The company also wants investors and analysts to stop focusing so heavily on subscriber growth to measure progress, and instead shift their attention to revenue.

“We are increasingly focused on revenue as our primary top line metric. This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth.”

To some extent, this makes sense. As the business model changes, US subscribers will be paying anything from $6.99 for the ad-supported tier to $19.99 for the premium, ad-free service, so the total subscribers metric doesn’t tell the whole story like it used to.

Nevertheless, adding more subscribers will still be crucial for the Netflix business model. If subscriber growth slows and existing subscribers ‘trade down’ to the ad-supported tier, overall revenues will take a hit. In an ideal world, no existing subscribers trade down and the ad-tier becomes a funnel for new subscriber additions only.

But this isn’t an ideal world. As Netflix is keen to point out, streaming is an extremely competitive business, and they say they’re doing it better than the competition:

Our competitors are investing heavily to drive subscribers and engagement, 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.

This may be true, but most of their competitors have streaming as part of a larger business, allowing them to use the service as a way to engage customers in many different ways. Disney is the perfect example, as we mentioned here.

Netflix can only compete as a streaming business, and there’s a credible argument that being a master of one trade, rather than a jack of all trades, is a key competitive advantage, allowing the business to focus on what’s truly important for their success.

“The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.”

The crackdown on account-sharing will also take shape from early next year, allowing sharers to manage profiles across devices, while also creating ‘sub-accounts’ for those wishing to pay for family and friends.

The Netflix transition is well underway, but it's still early days with a tricky macro environment to navigate.