(Bloomberg Opinion) -- Netflix Inc.’s business model was only supposed to work unless and until a recession hit, or so said conventional wisdom. That turned out to be very wrong. We’re now in a stay-at-home recession, and Netflix — along with Zoom, Instagram, TikTok and Amazon — has defined the experience.
Holed up, bored and ready to stream, nearly 16 million users signed up for Netflix subscriptions in the first quarter, according to results posted Tuesday — almost double the amount analysts expected. Most of those streaming converts came in March as the Covid-19 virus and resulting shelter-in-place orders spread from China to Italy to the U.S. and beyond. It’s a remarkable pace of growth that won’t last, as even Netflix admits. But more important, behind that number is a consumer that may be more convinced than ever that Netflix is a necessity. That can’t yet be said for other streaming-video services.
Walt Disney Co. launched Disney+ in November, and by the time the pandemic arrived, users may have already exhausted its best new content, such as its “Star Wars” series, “The Mandalorian.” Meanwhile, Netflix had a trifecta of hits in February and March alone that showcase the refreshing breadth of its library: Its wild docuseries “Tiger King: Murder, Mayhem and Madness” averaged a whopping 19 million viewers at any given minute over the first 10 days of its release, according to Nielsen. A week later came season three of “Ozark,” an intensely dark series full of clever twists that dare I say echos the quality of HBO. There was also the highly binge-able “Love Is Blind,” which put a new spin on dating-themed reality shows and just so happened to foreshadow what has since become a reality for many people — dating remotely before meeting the other person.
At a time when Netflix has never had more competition, it’s proving its value. “So far, the new bundles have been complements, not substitutes,” Michael Nathanson, an analyst for MoffettNathanson LLC, noted in an April 17 report. He found that about 80% of people using Amazon Prime Video, Hulu, Disney+ and Apple TV+ still also use Netflix:
Of course, with Hollywood shut down, Netflix and its rivals will all struggle to keep their apps stocked with enough content so that subscribers stay loyal. The good news for Netflix is that it will still be able to release all its originally planned programming for the second quarter (it says the mass quarantine is just making it harder to create dubbed versions in other languages for the time being). It’s hard to predict anything beyond this quarter for any industry.
With new productions on hold, Netflix’s free cash flow was actually — gasp — positive. But if anything, this insatiable demand for content is a reminder that streaming companies will have to keep spending to keep subscribers happy and get creative about how to turn this new industry into a consistently profitable one.
Even so, it’s now clear that the notion that a recession would cause the credit market to turn on Netflix and break its business model was short-sighted. Likewise, other extreme points of view will gradually be proven wrong: It’s year two of the streaming wars and there is still no “Netflix killer,” nor is Netflix the killer that will destroy all its new copycats. These are all positives for consumers.
It’s certainly fair to continue to quibble about Netflix’s absurd valuation: Its $200 billion enterprise value is more than 40 times adjusted Ebitda. Investors are “treating this company like it’s Amazon,” as if it will put all its rivals out of business, which is unlikely, said Michael Pachter, an analyst at Wedbush Securities, during a Bloomberg TV interview Tuesday. He said the stock price is “exceedingly optimistic” — and he’s right.
It’s just that Netflix hasn’t given anyone a reason not to be, or at least not yet. And a little optimism is refreshing right about now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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