Make no mistake, Netflix’s catastrophic Q1 earnings report Tuesday marks an inflection point for the entire video industry.
Netflix shares dropped 36% after the company said subscriber totals fell slightly (200,000 accounts) for the first quarter, and were expected to drop 10 times as much for the second quarter. Those would be the first quarters in a decade where Netflix didn’t see its subscriber rolls. Wall Street was suitably dismayed.
To ameliorate those declines, Netflix said it’s now planning a cheaper ad-supported tier, as many observers had long urged, and will begin to do something about a whopping100 million password sharers.
It’s a painful comeuppance for a company notable for its rather smug self-assurance that its unique corporate culture and industry-busting embrace of streaming at massive scale were the right approach for the future of entertainment. Tech giants Amazon and Apple dove into the streaming pool, as did all the major media companies. All wanted a piece of the price premium Wall Street was attaching to streaming ventures with global potential.
No more though. While Netflix share prices were absolutely battered (remember, the 36% drop comes on top of a similar-sized but slower decline since a mid-November peak of $701). Now shares are trading at around $226 apiece, and it’ll be a long time before those resuscitate.
“Even if the long-term (Total Addressable Market) is unchanged, the time to get there appears far longer than management anticipated,” wrote LightShed Partners analysts Rich Greenfield, Brandon Ross and Mark Kelley. “Simply put, Netflix felt vulnerable (Tuesday) in a way that it never has before, similar to how we felt about Mark Zuckerberg’s comments on Meta’s last earnings call.”
Netflix is even getting bounced from the FAANG fraternity, the mega-cap tech titans that have been leading the stock market for much of the past half decade. It’s suddenly a new era in streaming.
“This signals to us that the party is over,” said Karen Firestone, chairman and CEO of Aureus Asset Management. “We are saturated in the United States.”
By that, Firestone meant that the lucrative U.S. market is nearing maximum adoption; growth for any streaming service going forward likely will come at the expense of someone else, rather than as part of a rapidly growing pie of opportunity. That changes how Wall Street values the entire sector, and how companies evaluate their programming, marketing and financing.
Not surprisingly, several media companies formerly floating on a bubble of Wall Street goodwill toward streaming heard a loud pop on Wednesday: Disney was down 5.6%, just-launched Warner Bros. Discovery by 6%, Roku 6.2%, and Paramount Global 8.6%.
Worth watching over the next few days and weeks is how Wall Street treats the competitors as they report their own quarterly earnings and forward strategies. The questions may be more pointed, the interest in international expansion plans and revenue per user metrics more sustained.
Beyond the broad battle for eyeballs in a North American market that’s looking fully exploited, there are other pressing questions.
Will companies evolve their ruinous expensive Peak TV spending plans? Will they focus on fewer, bigger swings, hoping to more efficiently grab and sustain the attention of fickle subscribers?
Does spending $19 billion on content (with no sports or news costs to inflate the totals) still make sense for Netflix? Has the virtuous cycle of spend/make shows/raise prices to make more shows now broken? If so, what’s the company’s new vision? Will it make still more shows, or fewer, better ones that grab fans and keep them coming back?
“The single biggest issue that really was not talked about is that Netflix’s content, especially its English-language content, is simply not resonating relative to the level of spend,” the Lightshed analysts wrote in their note. “With Netflix spending far more than anyone else in the industry at $17 billion dollars annually, including $5 billion on movies, Netflix should be creating significantly more must-see TV series and movies that become ongoing franchises. Reminds us of one of former HBO’s boss Richard Plepler’s favorite lines: ‘More is not better, only better is better.’”
The man now presiding over HBO’s parent company, Warner Bros. Discovery CEO David Zaslav, is reported to already have raised questions about HBO Max program spending. While it’s great to have a culture-defining hit such as Euphoria, Zaslav reportedly mooted, does HBO Max need three shows like that?
Netflix has built some franchises – Zack Snyder’s Army of the Dead, Shonda Rhimes’ Bridgerton, the durable Stranger Things – and begun pushing their fans into live experiences, games and other ventures beyond the small screen.
But lots of observers say Netflix needs more big-name shows, especially because it doesn’t have a decades-old library to back up its new programming. Can it secure the franchises it needs? Some big swings last year whiffed memorably, most notably the $250 million Jupiter’s Legacy, cancelled after a single season.
It also seems clear that with inflation still jumping up, and more people returning to the workplace, consumer acquiescence to more price hikes is evaporating, especially for discretionary spending like entertainment subscriptions. How do companies structure their spending when they can’t count on price hikes to bail them out down the road?
Moving into advertising sounds great for Netflix, even if it’s taken more than a decade to get here. But it won’t be a quick nor simple solution to a festering mess in 2022.
Worse, it might not even solve the underlying problem, wrote Midia Research’s Mark Mulligan, who suggests the entire industry is facing an “attention recession,” as people grapple with more demands on their time in a post-pandemic reopening.
“The decline illustrates that Netflix does not operate in isolation, and is, instead, but one part of the interconnected attention economy, an economy that is now entering recession,” Mulligan wrote in a blog post Wednesday.
Attention matters with advertising, where actual viewership for all your shows has to be measured, somehow. For Netflix, getting into advertising will necessitate far more transparency than the notoriously secretive company has ever provided to outsiders, even its creative partners.
Will Netflix finally relent on its refusal to allow OEM TV makers, such as Vizio and Samsung, with ACR data-collection capabilities to finally gather that information on its apps on their interfaces? That would be a big deal for advertisers, program creators and competitors too.
Netflix’s entry into advertising may also open new opportunities for ratings measurement companies such as iSpot.TV (whose system Comcast/NBCUniversal recently adopted) as they build momentum to succeed Nielsen. Who wins the battle for Netflix may be well positioned for much bigger wins across the streaming industry.
Observers expect a lot of advertiser interest in that vast Netflix audience, but building a system may take until 2024, Netflix said.
In the meantime, Netflix faces a delicate balance on a lot of fronts. But it’s not just the Big Red N facing a reconsideration. Wall Street assumptions about the entire sector are now in question; how every major streamer adapts to the new reality will help decide which ones are still thriving, or existing, two years from now.
