Netflix faces dystopian future, hits don’t guarantee growth

Netflix appears to be heading against the wind in the final quarter of 2021, this dystopian Korean drama squid game Attracting millions of viewers and 150 original shows ready for release, including don’t look up, featuring Leonardo DiCaprio and Jennifer Lawrence.

The company said it was its “most powerful content ever.”

But the star-studded new releases weren’t enough for Netflix to significantly increase subscribers in the fourth quarter. The video streaming pioneer said Thursday that 8.3 million new users signed up for the service in the fourth quarter, the lowest number for the period since 2017.

To make matters worse, it forecasts that it will add just 2.5 million subscribers this quarter — down from 4 million last year and well below the first-quarter results of each of the past five years. Investors sold the stock on Friday, with shares down nearly 22% to $397.69.They have fallen more than 40% since their highs squid game The frenzy of November.

In addition to the weak guidance, the company’s results raised bigger questions about its business model. Among them: What happens if a hit new show isn’t enough to attract a ton of new Netflix subscribers?

squid game came out a week ago [the fourth quarter] Started, but Netflix’s biggest hit ever was not enough to add subscribers,” said Needham & Co analyst Laura Martin, who has a sell rating on the stock. “Content is no longer a competitive advantage”, Especially with legacy media groups investing heavily in their own streaming services.

Netflix is ​​expected to spend $18 billion on content this year, according to Morgan Stanley estimates, as it seeks to maintain its lead over rivals including Disney Plus, AT&T’s HBO Max, Apple TV Plus, Amazon Prime, Viacom CBS’ Paramount Plus et al. The Financial Times estimates that eight U.S. media companies will spend $140 billion on content this year as the streaming wars intensify, with analysts expecting double-digit spending growth over the next few years.

Investors seem to be waking up to the high costs of streaming businesses — and the often short shelf life of service content. Following the Netflix report, analysts at MoffettNathanson noted that the “rate of decay” of streaming content is “incredibly fast,” especially when popular shows can be binge-watched overnight.

That means “streamers must continually spend on new content to attract and retain new members, and any slowdown in that spending will lead to weaker subscriber growth,” the company said in a research note.

“We question whether streaming is a good business,” said Michael Nathanson, an analyst at the company. “It needs a lot of fresh content.”

Netflix said its higher content spending compressed operating margins to 8% in the fourth quarter, down 6 percentage points from a year earlier. A big boost to its profit margins would mean spending less on content, which many believe is unlikely given how competitive the streaming market is.

Netflix raised its U.S. price this month from $14 to $15.50 a month, a lot more than Disney Plus’ $8 a month price. Netflix officials highlighted last week that subscriber churn fell in the fourth quarter, and they said plans to break even and become free cash flow positive this year are on track.

Netflix, Disney and other streaming companies enjoyed huge subscriber gains during the 2020 lockdown, but a return to more normal day-to-day activities slowed growth.

The company blamed “macroeconomic difficulties in several parts of the world,” especially Latin America, for the disappointing user growth. It said competition “may be affecting our marginal growth,” in a rare acknowledgment that it is facing pressure from other streaming services. But it added that it continued to grow in every country where its rivals launched.

Netflix Chief Executive Reed Hastings said it was difficult to pinpoint the cause of the slowdown because “there’s so much noise from the coronavirus.”

But Martin said Netflix underestimated the impact of increased competition on its subscription growth. “Part of the problem is that Netflix doesn’t think they have a problem,” she said. “I’ve come to the conclusion that the competition is real, but they haven’t come to that conclusion yet.”

She said the streaming market will become more stable once there is a consolidation period, which she thinks will happen in three years or sooner.

“three [streamers] There has to be bankruptcy, three people have to survive,” she said. “Then the content can become more reasonable in terms of pricing. “

For his part, Hastings said there was no reason to question the company’s trajectory. “We keep calm,” he said.

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