Netflix Is Showing A Mixed Picture As Its Business Model Continues To Evolve

On Tuesday, Netflix Inc’s NFLX issued its first quarter earnings that portrayed a somewhat mixed picture, with revenues topping Wall Street estimates and revenue coming in slightly below them. Some delays are expected to boost results later in the year, yet there are also fears of a writers’ strike in the air that could significantly harm the streaming giant’s content production.

First Quarter Results

For the quarter ended on March 31st, Netflix gained 1.7 million subscribers around the globe, which is significantly below the 2.3 million that Wall Street analysts had expected. Revenue rose 3.7 percent to $8.16 billion, slightly below Refinitiv’s expectation of $8.18 billion, but net income dropped from $1.6 billion to $1.3 billion with earnings of $2.88 per share topped expectations.

Outlook

Netflix expects second quarter revenues to be roughly $8.24 billion, less than the $8.47 billion expected by Wall Street analysts. The boost from ‘paid sharing’ service is expected later in the year as the streaming giant has pushed back the account sharing crackdown in the U.S. while it works on improving the quality of the new service.

Saying Goodbye To What Got It Started

After 25 years, Netflix announced it will be winding down its DVD rental programme in September, marking the end of an era as this service was the core of the company’s business model when it enter the playfield. 

Efforts To Boost Top And Bottom Lines

With intense streaming rivals like the Walt Disney Company DIS, the once streaming pioneer is forced to focus more on profits. Even Disney+ lost a net 2.4 million subscribers during the last three months of 2022 which is also its first decline since Disney introduced its streaming star back in 2019.  Despite earnings topping Wall Street expectations thanks to theme parks, even Disney is undergoing significant transformation of its business model. 

After Netflix revealed last April it had lost subscribers for the first time in a decade, it introduced two new initiatives that aim to boost revenue and profits: the crackdown on password sharing and the introduction of a new advertising-supported service, which had its debut in November last year.

Ad-supported Services

According to CFO, Spencer Neumann, this initative is still in “start-up mode”. This strategy is certainly paying off to Roku Inc ROKU whose business model is based on advertising with revenue sharing deals with the thousands of apps it hosts on its popular platform. Roku even joined forces with Microsoft Inc MSFT to improve the ad buying experience and optimize ad performance. Despite seeing a weakness in advertising market, Roku’s shares are 58% up year to date. Roku will also be laying off 6% of its workforce and is certainly not at its highest, but 2022 was its second-best year of growth with a net addition of 9.9 million active accounts and hours streamed growing even faster than user growth, and when engagement is growing, it’s all that matters in the end. 

Delay In Crackdown Of Password Sharing Pushes Benefits Of The Initiative To Later In The Year 

Originally planned for the first quarter, the wider launch of paid password sharing to the US and three other markets has been delayed to the second quarter. Consequently, some of the membership growth and revenue benefits will be shifted from the second quarter to the third quarter. Moreover, Netflix’s service could see a modest short-term drop-in engagement, but it is expected to recover over time. Despite the delays, Netflix is confident in achieving its full-year targets. 

Despite the rollout delays, Netflix said it was confident it could hit its full-year targets, being pleased with the rollout of the initiative in Canada, New Zealand, Portugal and Spain. 

Crackdown of password sharing – an efficient strategy that takes time.         

In its letter to shareholders, Netflix stated that its paid sharing service caused an initial “cancel reaction” after being launched in Canada and Spain. Although it had initially hurt the “near-term” growth in membership numbers, it ultimately resulted in higher subscriptions and revenue as the borrowers gave in and activated their own accounts. In Canada, the paid subscriber base has expanded since the introduction of the service. 

Writers’ Strike

CEO, Ted Sarandos, warned of a devastating impact of the Writers Guild of America’s potential strike that could happen next month, but he added a strong foundation of international content will equip Netflix to weather this Hollywood storm. Hoping that this scenario will be avoided, Netflix expects to spend about $17 billion in 2024 on content alone as it bears fruits of its password sharing crackdown.  Considering that Netflix estimates 100 million households to be sharing accounts, which equates to about 43% of its global user base, password sharing has undoubtedly been affecting its ability to invest in new content.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.