Netflix appeared to have the wind at its again heading into the ultimate quarter of 2021, with the dystopian Korean drama Squid Recreation drawing tens of millions of viewers and 150 authentic programmes prepared for launch, together with Don’t Look Up, that includes Leonardo DiCaprio and Jennifer Lawrence.
It was, the corporate mentioned, its “strongest content material slate ever”.
However the star-studded new releases weren’t sufficient to present Netflix a big enhance in subscribers within the fourth quarter. The video streaming pioneer mentioned on Thursday that 8.3m new subscribers signed up for the service within the fourth quarter, the bottom quantity it had added within the interval since 2017.
Worse, it forecast that it will add solely 2.5m subscribers within the present quarter — down from 4m final yr and properly under its first quarter efficiency over every of the previous 5 years. Buyers dumped the inventory on Friday, sending the shares down almost 22 per cent to $397.69. They’ve fallen by greater than 40 per cent for the reason that peak of Squid Recreation mania in November.
Past the weak steering, the corporate’s efficiency raised larger questions on its enterprise mannequin. Amongst them: what occurs if standard new reveals are usually not sufficient to lure plenty of new subscribers to Netflix any extra?
“Squid Recreation got here out per week earlier than [the fourth quarter] began, however the greatest hit of all time on Netflix was not sufficient so as to add subscribers,” mentioned Laura Martin, an analyst at Needham & Co, who has a promote score on the inventory. “Content material is not a aggressive benefit,” particularly with conventional media teams investing closely in their very own streaming providers.
Netflix is predicted to spend $18bn on content material this yr, in response to Morgan Stanley estimates, because it seeks to take care of its lead towards opponents together with Disney Plus, AT&T’s HBO Max, Apple TV Plus, Amazon Prime, ViacomCBS’ Paramount Plus and others. The FT has estimated that eight US media firms will spend $140bn on content material this yr because the streaming wars intensify, and analysts anticipate spending to extend by double digits within the subsequent few years.
Buyers look like waking as much as the excessive price of the streaming enterprise — and the usually quick shelf lifetime of content material on the providers. After the Netflix report, analysts at MoffettNathanson famous that the “decay fee” of streaming content material was “extremely fast”, particularly when standard programming may very well be binged in a single evening.
Which means “streamers should constantly spend on new content material to seize and maintain new members, with any slowdown in that spend leading to a softer quarter” for subscriber development, the agency mentioned in a analysis word.
“We query whether or not or not streaming is an efficient enterprise,” mentioned Michael Nathanson, an analyst on the agency. “It requires a tonne of contemporary content material.”
Netflix mentioned its greater content material spending compressed working margins to eight per cent within the fourth quarter, down 6 proportion factors in contrast with a yr earlier. Elevating its margins considerably would imply spending much less on content material, which many see as unlikely given the depth of competitors within the streaming market.
Netflix raised its costs within the US this month to $15.50 per thirty days from $14 — a premium to the $8 per thirty days charged by Disney Plus. Netflix officers emphasised final week that subscriber churn had gone down within the fourth quarter, and so they mentioned plans to interrupt even and turn out to be free money stream constructive this yr have been on observe.
Netflix, Disney and different streaming firms racked up large subscriber positive factors in the course of the 2020 lockdowns, however a return to extra regular routines has slowed development.
The corporate blamed the disappointing subscriber development partly on “macroeconomic hardship in a number of elements of the world”, notably Latin America. It mentioned competitors “could also be affecting our marginal development”, a uncommon acknowledgment that it was dealing with stress from different streaming providers. Nevertheless it added that it continued to develop in each nation by which its rivals had launched.
Reed Hastings, Netflix chief government, mentioned it was laborious to pinpoint the reason for the slowdown as a result of “Covid has launched a lot noise”.
However Martin mentioned Netflix was underestimating the impression that rising competitors was having on its subscription development. “A part of the issue is that Netflix doesn’t suppose they’ve an issue,” she mentioned. “I’ve come to the conclusion that competitors is actual however they haven’t come to that conclusion but.”
She mentioned the streaming market would turn out to be extra secure as soon as there was a interval of consolidation, which she thinks would occur in three years or earlier.
“Three [streamers] should go bankrupt and three should survive,” she mentioned. “After which content material can turn out to be extra cheap by way of its pricing.”
For his half, Hastings mentioned there was no cause to query the corporate’s trajectory. “We’re staying calm,” he mentioned.