Netflix's pandemic party turns to hangover as lockdowns lift
Though its library of new shows may be minimal thanks to the pandemic, Netflix still managed to release an original straight from the horror category on Tuesday.
Investors were spooked to learn that the first three months of this year – traditionally a big period for the streaming giant – brought its worst first quarter subscriber growth in four years, with 12m fewer sign-ups than the same period in 2020.
If that wasn’t enough, Netflix warned in a letter to shareholders that the next quarter would be even worse, predicting just 1m additional signups. Its shares sank 12pc within minutes of the letter appearing online, despite booking revenues of $7.2bn (£5.2bn).
Netflix blamed the gloomy outlook on heightened sign-ups during the pandemic as families were forced inside under government restrictions. ”It really comes down to Covid,” said chief financial officer Spencer Neumann, arguing that lockdowns had artificially boosted 2020’s numbers by “pulling forward” growth from 2021.
Co-chief executive Reed Hastings smiled genially as he added his reassurance: “We had those 10 years where we're growing smooth as silk, and then it’s just a little wobbly right now.”
Nevertheless analysts are alarmed, not least due to the role of on-set disruptions in forcing a lighter content offering. “A lot of the projects we'd hoped to come out earlier did get pushed,” admitted chief content officer Ted Sarandos, though he vowed that normality would soon be restored by impending major releases.
“Putting it frankly, subscriber growth is the only number that really matters,” says Sophie Lund-Yates at Hargreaves Lansdown. “Management was expecting growth to temper, but not this much, which is why these results are unwelcome.”
Lund-Yates says that offering the latest must-watch is “crucial” as competition in the space heats up. “A lacklustre content offering is being given as a reason new customers were hard to come by in the last three months,” she adds.
Content squeeze
This slowdown comes at a dangerous time for Netflix. The long-prophesied content squeeze, in which TV and film companies progressively withdraw their titles to stock their own rival services, appears to be gathering pace, making Netflix newly reliant on original productions.
According to data from What’s On Netflix, a website that tracks new arrivals on the service, the proportion of original titles added to Netflix each month has climbed from as low as 8pc in mid-2018 to almost 41pc today, and is on track to pass the halfway mark this year.
However, the actual number of original titles arriving each month has barely increased in two years, while the number of licenced titles has plummeted. As a result, the overall rate of new additions has dropped to its lowest point since June 2018.
Netflix disputes such estimates, saying that it has released more content every quarter than it did in the previous period. Still, this problem is why Netflix plans to spend $17bn on content in 2021 alone – around the same as last year.
It has ordered two more series of Bridgerton and struck a deal with Sony Pictures to be the first streaming service to show Jumanji and Spider Man after they appear in the cinema.
Yet not all analysts believe subscriber growth is the key metric to watch. Paolo Pescatore, an analyst at PP Foresight, says that Netflix is at a different stage of growth compared to its rivals and therefore investors should look at whether it can become self-sufficient and less dependent on debt.
“It will be many years before many other streaming services turn a profit,” says Pescatore. “All are placing huge bets and will be loss leaders for years.”
Either way, the competition will remain stiff. On the same day, BBC iPlayer reported a record first quarter, driven by the success of new titles like The Serpent and Bloodlands, RuPaul’s Drag Race UK and popular box sets like Pretty Little Liars and Not Going Out.
It said that January was iPlayer’s most successful month, with 652m streams. The first episode of Line of Duty had more than 3.6m streams in just 11 days up to the end of March, it added. With an average of 9.1m accounts signing in to iPlayer weekly in 2019-20, up from 6.4m the year before, it is hardly eating into Netflix's market. But Disney, HBO and Hulu are also contenders.
None of that seemed to trouble Hastings, who said his employees could not find any evidence that its missed targets this quarter were due to increased competition.
“We really looked through all the data – you know, looking at different regions where new competitors are launched or are not launched,” he said. “We just can’t see any difference… which is what gives us confidence. It’s intensely competitive, but it always has been.”
Even Disney+, he added, is not yet a primary competitor with Netflix, despite its rapid growth. Instead he urged investors to judge his performance against that of YouTube and the ailing behemoth of traditional TV.
