Netflix Inc (NFLX)

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Netflix Pins its Hopes on Old Business Model
By: TheStreet | July 23, 2022

• The streaming giant thinks its problem is its price point and competition, not its content.

Netflix has released its second-quarter earnings, and CEO Reed Hastings can console himself that at least it wasn’t as bad as the first quarter.

The streaming service lost 970,000 paid subscribers during the second quarter, which isn’t great. But the company had anticipated losing 2 million customers, so from its perspective, things could be worse. As a result, revenues rose, as we noted recently, 8.6% from last year to $7.97 billion.

For comparison’s sake, in Netflix’s (NFLX) first quarter of this year, it infamously lost 200,000 global subscribers, bringing its total subscriber number down to 221.64 million and losing an eye-popping 35% of its stock value and $7.93 billion in revenue originally projected by analysts.

In response, the company began a wave of layoffs, and had observers wondering if the company had hit a natural ceiling of customers and if it's time as the undisputed king of streaming had come to an end.

So while it’s likely too early to declare that the bleeding has stopped, Hastings referred to the total numbers in a recent investors call as “the less bad results."

Netflix Blames the Economy, Competition

No matter how bad the news, executives always have to put on a positive face to investors during earnings calls. So even when things aren’t going great, it’s their job to point out that things could be going a lot worse and there’s a plan in place to turn things around.

So Hastings did what he had to do, telling investors that the sky is the limit for the streaming world, and predicting “the end of linear TV over the next five, 10 years.”

Ted Sarandos, Netflix’s Co-Chief Executive Officer and Chief Content Officer, also did his best to project optimism, saying “Billions of people around the world love streaming TV and film, and we only serve a few hundred million of them.”

When asked why they’ve been bleeding subscribers, executives pointed to a number of factors.

Spence Neumann, Chief Financial Officer, attributes part of the loss to a recent bump in the price of subscriptions, saying “We always expect to see some slight elevated churn after price increases.” He also pointed to other “headwinds” that are getting in the way of subscriber growth, including “competition and some of these macroeconomic factors like higher inflation, as well as the invasion of the Ukraine and the knock-on effects around EMEA and other parts of the world. So, we're still kind of working through that.”

Netflix Makes a Big Bet

Netflix seems to be of the strong opinion that its new advertising supported tier will be the panacea it’s looking for, saying that it will make the service more accessible to people, while also driving revenue.

Interestingly, when discussing the advertising supported tier, earnings call interviewer Doug Anmuth of J.P. Morgan raised the question of whether “Netflix needs to renegotiate deals perhaps with content providers to monetize through advertising,” in terms of licensing content, as well as if “Netflix needs to renegotiate deals perhaps with content providers to monetize through advertising.”

In other words, in order to get access to the catalog of classic films and TV shows that Netflix built its brand on, and which are increasingly migrating over to the various streaming services that media companies are now building around their intellectual property, such as Paramount+ (PARA) and Comcast’s (CMCSA) Peacock, will Netflix have to cut companies such as Peacock in on their advertising revenue in order to continue to be able to stream, say, episodes of “Cheers?”

In response, Sarandos notes it’s possible that some content will only be available on advertising-supported tiers, saying “we will clear some additional content, but certainly not all of it.”

But perhaps sharing some ad revenue to help build its catalog back up is the company’s best bet. Inflation and increasing competition from streaming services such as Disney+ (DIS) are doubtlessly big contributors to Netflix’s loss of customers.

But to take the earnings call at face value, none of the executives seem to realize, or are willing to admit, that a big part of the problem is that the company just doesn’t have enough stuff that people want to watch, and that it’s approach of making a lot of stuff, some good, most forgettable, has run its course.

As we've previously noted, Netflix just makes too many bad shows, and quantity is not better than quality.

A strategy rethink seems badly needed. But does Netflix realize this?

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