Netflix’s shocking report that it lost 200,000 subscribers in the first quarter not only sent the company’s shares plunging, but it also cast a shadow on the big media companies following Netflix’s lead by plowing assets into direct-to-consumer streaming businesses.
“Netflix has long set the standard for all traditional media companies that are in the midst of pivoting their business models away from the disrupted linear ecosystem towards streaming,” RBC Capital Markets analyst Kutgun Maral said. “However, softer than expected 1Q22 subscriber and financial results along with a marked change in tone from management over its growth prospects will continue to put into question the longer-term attractiveness — or even viability — of the streaming video business model. We expect investor sentiment on media companies that are looking to grow in streaming to remain volatile — primarily Disney, Paramount and Warner Bros. Discovery.”
Netflix's stock dropped 27% in after-hours trading Tuesday. Disney was down 5%; Paramount was unchanged and Warner Bros Discovery dipped 4%.
On Wednesday, Netflix shares plummeted 36% to 222.04 in mid-day trading. Disney was down 4%, Paramount was flat and Warner Bros Discovery dropped 5%.
“If Netflix thinks the near-term upper band for paid streaming subscribers is hitting a wall at 220 million, then any companies with large out-year subscriber and revenue per unit targets should be a bit more nervous today,” MoffettNathanson analyst Michael Nathanson said.
LightShed Partners partner and media & technology analyst Rich Greenfield, who has long heralded the demise of traditional TV, now has doubts about streaming being a money-making business.
Sewing Doubts About Streaming
“Streaming TAM [total available market] is clearly more challenging to achieve as evidenced by both Disney and Netflix reversing their position on advertising within the past three months. It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience,” Greenfield said in a blog post titled, “Is It Time for #GoodLuckStreaming?”
“With TAM in question, increasing competition from tech giants (Apple and Amazon) who do not care about the short-term profits of SVOD [subscription video-on-demand] and the need to constantly retain users with must-see programming (which is hard to create 365 days a year), it is becoming clear that the profitability of SVOD may not be nearly as compelling as investors hoped and certainly nowhere near as profitable as the legacy businesses that streaming is replacing,” Greenfield said.
The new ceiling on streaming has Greenfield speculating that Disney might be better off selling control of Hulu to Comcast, rather than buying out Comcast’s minority stake, as has been expected.
“Disney needs to focus on what Disney does best, creating family-friendly content that has global appeal with franchises that can be leveraged across its businesses,“ Greenfield said. “Why try to compete in adult dramas/comedies/reality TV etc. if the subscriber ceiling is lower than you anticipated?
“In addition, with $20-plus billion from selling Hulu, Disney could de-lever and invest far more heavily in original programing for Disney Plus,” Greenfield added. “And for Comcast/NBCU buying Hulu, they would immediately take Peacock from an irrelevant service to a major player (albeit it would be quite dilutive to Comcast given the lack of profitability at Hulu).”
Even as its subscriber growth slowed, many on Wall Street were bullish about Netflix going into this crucial quarterly report.
Nathanson, who has had a sell recommendation on Netflix for a while, praised Netflix for building a formidable company on the newfangled streaming technology, but he said that management seemed as shocked as Wall Street was.
“At almost every single impasse they have faced before, the company found a way to safely maneuver before hitting the wall,” Nathanson said of co-CEOs Reed Hastings, Ted Sarandos and company. “However, this time it feels different as the first quarter 2022 earnings release, investor letter and video interview portrayed a company that was more surprised by things and less clear than ever before about the path forward.”
It now looks like the total available market for streaming, instead of being all broadband homes in the world (about 1 billion) is closer to 400 million homes, Nathanson said. Factors including affordability, online payment systems and willingness to pay for premium content limits that total addressable market.
Netflix’s password-sharing problems — involving some 100 million users — indicates the market, particularly in the U.S., is already close to saturation, he said.
Nearing the Saturation Point?
“Going forward, we are interested to see how consumers — especially those at the newly raised $19.99 monthly premium plan for four simultaneous streams — react to the clamping down on out-of-household usage and a request to pay even more for the service,” Nathanson said.
And after saying its main competition was other forms of entertainment, Netflix management acknowledged that all of the streaming services that have popped up in the past two years are taking a toll on Netflix’s own growth.
“Going forward, the company plans to grow share of viewing faster while decelerating growth in cash content spend,” Nathanson noted. “We question how easy that would be in a world where everyone wants to take share in the market by spending more on content!”
RBC Capital's Maral also sees the streaming business becoming more difficult from a competitive point of view.
“While more nascent streaming services like Disney Plus, HBO Max, Discovery Plus or Paramount Plus are at much different stages in their growth profiles than Netflix and should not be seeing similar headwinds from high household penetration, the pressures Netflix is seeing from competition should be felt similarly across the board and limit conviction in sub growth for our coverage,” Maral said. “Further, Netflix’s reluctant introduction of a lower-priced ad-supported tier over the next year or two will in turn raise competitive pressures for all other streaming video platforms, impacting not just sub growth or pricing power but also share of ad dollars.”
Wells Fargo analyst Steven Cahall, a Netflix bull who had downgraded the stock to “equal weight” or hold, said this report could change the way Wall Street looks at Netflix and its media competitors.
"Historically, good for Netflix meant bad for traditional Media as subs were defecting," Cahall said. "By 4Q21, bad for Netflix = bad for Media as everyone faced lower streaming returns."
“Now, we think we're back to bad for Netflix equals good for media as the slowing Netflix subs will be perceived as market share gains at peers,” Cahall said. “Netflix's ad strategy is a risk to traditional media, but 35 million U.S. and Canadian subs at about $8/month ad ARPU is only about 5% out of our $67 billion in '23E U.S. media revenue.” ■
Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.
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