Good morning,
Two podcast notes:
- Andrew and I discussed the China Chip Ban on Sharp Tech.
- John and I reacted to John Carmack’s metaverse grumpiness on Dithering. Even if you’re not a regular Dithering listener I recommend this one, as we cover new ground on Meta’s announcement (I think Carmack’s criticisms are valid and that Meta may be making a big tactical error).
As a reminder you can add both podcasts to your preferred podcast player by clicking the links at the bottom of this email.
On to the update:
Netflix Earnings
From Bloomberg:
Netflix Inc. is growing again, and Hollywood can breathe a sigh of relief. The streaming leader added 2.41 million customers in the third quarter, exceeding internal forecasts as well as expectations on Wall Street. Netflix grew in all regions of the world and said in a shareholder letter on Tuesday that it expects to sign up another 4.5 million globally this period.
While Netflix isn’t growing as quickly it was a couple years ago, the world’s most popular TV network is back on a positive trajectory. More customers are signing up than earlier in the year, the company said Tuesday. That’s good news for investors in Netflix and its peers who suffered steep stock-market losses earlier in the year. “Thank God we’re done with shrinking quarters,” co-founder and Chairman Reed Hastings said during a webcast interview with analyst Doug Anmuth.
Shares of Netflix rose as much as 14% in premarket trading before New York exchanges opened on Wednesday. The stock was down 60% this year through the close Tuesday in New York. Other streaming companies, such as Roku Inc. and Walt Disney Co., also rose.
Netflix is 20 years old, and still the stock swings by double-digit percentages based on subscriber numbers — it’s kind of amazing! You can also see why Netflix plans on getting out of the business of predicting net subscriber ads; the company said in its letter to shareholders:
As discussed in previous letters, 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. So, starting with our Q4’22 letter in January of 2023, we’ll continue to provide guidance for revenue, operating income, operating margin, net income, EPS and fully diluted shares outstanding for the following quarter, but not paid membership. Similar to our regional membership disclosure, we’ll continue to report our global and regional membership each quarter as part of our earnings release.
On one hand, I’m always grumpy when companies decrease the amount of information they are disclosing; on the other hand, this specific number is read into so deeply that I’m honestly not sure how much value it provides other than to speculators. Of course not giving a prediction may only make the swings worse, but, as Netflix does fairly note, the company’s monetization capabilities will, particularly with the addition of ads, be increasingly independent of subscriber numbers.
That noted, one couldn’t escape the feeling that the positive numbers had the same psychological impact on Netflix’s executives: both the letter to shareholders and earnings interview were extremely positive, filled with both optimism and a good amount of back-patting about how well Netflix was positioned going forward.
Netflix Doubles Down
Where this optimism translated most concretely was in the shareholder letter: yes, Netflix is doing ads (more on that in a moment), but the letter doubled-down on nearly every other aspect of Netflix’s strategy that has, at least amongst analyst and company observers, been up for debate.
First, Netflix is doubling-down on bingeing versus weekly releases:
We think our bingeable release model helps drive substantial engagement, especially for newer titles. This enables viewers to lose themselves in stories they love. As the Google Trends chart shows, the ability to watch all of Monster: The Jeffrey Dahmer Story helped drive significant interest in the show.
It’s hard to imagine, for example, how a Korean title like Squid Game would have become a mega hit globally without the momentum that came from people being able to binge it. We believe the ability for our members to immerse themselves in a story from start to finish increases their enjoyment but also their likelihood to tell their friends, which then means more people watch, join and stay with Netflix.
Second, Netflix is doubling-down on movies:
Film is incredibly important to our members. We expanded into original film in 2016 because producing our own movies across all budgets and genres has advantages over the next best alternative: only licensing from other studios in the first pay TV window (the “pay-one” window). Those advantages include first window availability on Netflix (pay-one movies debut generally well after theatrical release), global rights (pay-one movies are licensed by country), the ability to carry the films on Netflix in perpetuity (typically only for 18-24 months for pay-one films) and copyright ownership, enabling us to create derivatives like sequels and to use the intellectual property (IP) in games and consumer products. We continue to complement our original films with 3rd party licensed films – they remain an important and valued part of our service, but they are just one component of our broader programming strategy.
Third, Netflix is doubling-down on games:
Beyond TV and movies, we’re coming up on the one year anniversary of our gaming launch. As we’ve said, this will be a multi-year journey for us to learn how to please game players. Our first year was about establishing our gaming infrastructure and understanding how our members interact with games. We now have 35 games on service (all included in every Netflix subscription without in-game ads or in-app purchases) and we’re seeing some encouraging signs of gameplay leading to higher retention. With 55 more games in development, including more games based on Netflix IP, we’re focused in the next few years on creating hit games that will take our game initiative to the next level.
Fourth, Netflix is doubling-down on being one of the last companies standing in streaming:
As it’s become clear that streaming is the future of entertainment, our competitors – including media companies and tech players – are investing billions of dollars to scale their new services. But it’s hard to build a large and profitable streaming business – our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that could be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit. For incumbent entertainment companies, this high level of investment is understandable given the accelerating decline of linear TV, which currently generates the bulk of their profit.
Ultimately though, we believe some of our competitors will seek to build sustainable, profitable businesses in streaming – either on their own or through continued industry consolidation. While it’s early days, we’re starting to see this increased profit focus – with some raising prices for their streaming services, some reigning in content spending, and some retrenching around traditional operating models which may dilute their direct-to-consumer offering. Amidst this formidable, diverse set of competitors, we believe our focus as a pure-play streaming business is an advantage. Our aim remains to be the first choice in entertainment, and to continue to build an amazingly successful and profitable business.
For the record, I would like to see a hybrid approach to release schedules: I totally agree that the bingeing model helped make Squid Game a hit, but shows that are already popular could arguably become more so with the FOMO that builds up around event shows. By the same token, I’m skeptical about movies, but it’s hard to know for sure without data, while I’m more skeptical about games. The big question is the last one: as I’ve noted repeatedly I predicted that Netflix would struggle during this five year period when everyone tried to build a streaming service, but would be well placed when consolidation hit; the Discovery Time Warner tie-up was concerning in this regard as it introduced another company in it for the long haul. Time will tell if the optimistic take was justified, but hey, it was good to see Reed Hasting and company in a great mood.
Netflix’s Ad Tier
Last week, from the Wall Street Journal:
Netflix Inc. will charge $6.99 a month for its new ad-supported tier of service when it debuts next month, the company said Thursday, releasing the plan a month before the launch of Disney+’s ad-backed streaming tier and for one dollar less. Netflix said the new tier, called “Basic with Ads,” will initially be available in 12 countries including the U.S., U.K., Canada, Germany, Japan, Brazil and Australia, though it plans to launch more broadly over time. The ad-supported tier will launch in those initial markets globally in stages between Nov. 1 and 10, the company said…
Netflix’s basic ad-free plan costs $9.99 a month in the U.S. The company also has plans that cost $15.49 and $19.99 a month with varying degrees of simultaneous-viewing limits and better-quality streams. Netflix’s ad-supported tier will have lower resolution for viewers than the $15.49 and $19.99 tiers but will still be high definition.
Here is what the plans will look like starting next month:
Netflix emphasized that the advertising plan was additive, and that existing subscribers would not be affected; Chief Operating Officer Greg Peters also said that ‘Basic with ads’ would monetize the same as — or better than — the ‘Basic’ plan with no ads:
I think it’s important just to reiterate that we don’t see a lot of plan switching on the existing plan set. So that’s I think a worthwhile point to note. And then, obviously, as we stated before we’re not really trying to steer our members to one plan or another. We’re trying to take a pro-consumer approach and let them find and land on the right plan for them. And as we stated we modeled out that expected performance on ad monetization and factor that into our thinking around price point for the basic with ads. And so we really anticipate that this is going to be a pro-consumer model that will be more attractive bring more members in because the consumer pricing price is low. But then again the economics and the revenue will be fine as a result even if some of those consumers switch plans. And again just to restate this when you factor in those extra members, we expect this leads to a significant and incremental revenue and profit stream.
This is, in some sense, another example of doubling down: in this case Netflix is doubling down on growing its subscriber base, because this approach only makes sense if Netflix thinks that it is going to get a good number of new customers with a $3/month lower price. Indeed, the narrowness of this offering gives the impression that Netflix isn’t fully bought into or confident in its advertising plans: it would make much more sense to me to either fold all of Basic into Basic with Ads, or offer an advertising option for all of its tiers. After all, a big part of making this advertising plan work is getting the offering to scale, and right now this seems like an awfully big bet on the sort of growth Netflix hasn’t seen for a while.
That noted, all of this is subject to change, and probably will: what is impressive is how quickly Netflix has gotten up-to-speed on the advertising business. It seemed clear that the decision to add an advertising tier was made at the last minute (Bloomberg reported that Hasting’s announcement “blindsided most of his employees”), and much of Netflix’s initial comments, including references to programmatic advertising, didn’t make any sense for a streaming service new to the business. Fast forward six months and the company is talking about how attractive its offering is for brand advertisers, its work in building up a sales team, and admitting that personalization would only come with time. Oh, and ads are launching next month — like I said, the speed is impressive, and honestly a bullish indicator that Netflix can still execute.
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