Is Netflix really out of the woods?
“Thank God we’re done with shrinking quarters!”
The words of Reed Hastings on Netflix’s recent Q3 2022 earnings call. Whilst his relief is understandable after two successive quarters of subscriber losses, is he right to frame shrinking quarters as a thing of the past?
The near term is certainly looking rosier, with the 2.4 million subscribers added in Q3 2022 more than making up for the 1.2 million shed in the previous two quarters (which included their exit from Russia and a price hike).
Other reasons to be optimistic include the early launch of their competitively-priced ($6.99/£4.99) ad-supported tier (the catchily-named ‘Netflix Basic with ads Plan’), which rolls out from tomorrow, beating Disney+ to the punch.
Profile Transfer is also now out of testing, enabling users making use of someone else’s account to port their profile to a new account. Whilst still carrot at this stage, this paves the way for Netflix to start introducing some stick when it comes to clamping down on account sharing.
However, the horizon isn’t free from clouds.
Content costs remain under pressure, exacerbated by the global economic slowdown, and subscriber growth appears to have hit a ceiling in three of the four regions.
Growth in the US & Canada has stalled with subscriber numbers now back where they were 2 years ago (73 million). Growth in Europe, Middle East & Africa has also stagnated around the 74 million mark. Ditto Latin America at 40 million.
The growth in global subscriber numbers is being driven exclusively by Asia-Pacific (APAC) where Netflix has added an impressive 3.6 million subscribers this year. However, average revenue per membership has been declining in APAC (from $9.60 in Q3 2021 to $8.34 in Q3 2022).
Netflix will obviously be hoping it can repeat the feat it’s pulled off in other regions of growing the subscriber base at a lower cost then increasing prices without shedding too many subscribers. However, that was in different economic times.
Whilst Netflix’s main global streaming competitors (Amazon, Disney, Apple) continue to enjoy the luxury of multiple other established profitable lines of business, Netflix is continuing to double-down on its bet on a diversification into gaming with the acquisition of a sixth gaming studio, Spry Fox.
These acquisitions will undoubtedly improve Netflix’s gaming content pipeline. However, they won’t solve its major distribution challenge - no clear path to getting those games onto the screen Netflix is overwhelming used on: the TV.
Whilst mobile gaming is undoubtedly big business, the need to distribute the games as individual App Store downloads makes it harder for Netflix to become a gaming hub in the way it is for TV content and PlayStation Network and Xbox Live are for big-screen gaming (it’s going to be interesting to see how gaming manifests on TikTok).
Whilst I think it’s likely Netflix will now enjoy a number of quarters of growth, I strongly suspect that ‘shrinking quarters’ are not wholly within the company’s rear-view.
Well I bought a few shares for fun in the massive dip when they announced the squid game idea and am sitting on a 60% return (for now), so let's hope those days are indeed behind them. That said, the only reason I haven't cancelled my Netflix is the kids' demands. And Netflix have packaged the ad tier cleverly to minimise downgrade path for all but the most impoverished singletons. To your point about the games distribution problem - is Netflix overwhelmingly used on TVs? And if it is, how is that a problem? In our house Netflix is mostly all consumed on ios devices. I bet most parents have no idea how much attention kids are giving to those installed Netflix games, but they will when they want to cancel their sub - and the kids scream "no". Flash forward a few years when the market consolidates and attention gets even more fierce, games represent a good moat for Netflix, by which time they'll have presumably figured out the 'hub' problem. Interesting parallel/challenge there for Spotify with their Podcasts treatment.