Thu. May 19th, 2022

Netflix seemed to have the wind in its back on its way to the final quarter of 2021, with the dystopian Korean drama Squid Game attracts millions of viewers and 150 original programs ready for release, including Do not look up, with Leonardo DiCaprio and Jennifer Lawrence.

It was, the company said, its “strongest content page ever”.

But the star-studded new releases were not enough to give Netflix a significant boost in subscribers in the fourth quarter. The video streaming pioneer said Thursday that 8.3 million new subscribers signed up for the service in the fourth quarter, the lowest number it has added in the period since 2017.

Worse, it predicted it would add just 2.5 million subscribers in the current quarter – down from 4 million last year and well below its first quarterly performance over each of the past five years. Investors dumped the stock on Friday, lowering the stock by nearly 22 percent to $ 397.69. They have fallen by more than 40 percent since the peak of Squid Game mania in November.

In addition to the poor management, the company’s performance has raised bigger questions about its business model. Among them: what happens if popular new shows are not enough to attract many new subscribers to Netflix?

Squid Game came out a week before [the fourth quarter] started, but the biggest hit of all time on Netflix was not enough to add subscribers, ”says Laura Martin, an analyst at Needham & Co, who has a sell rating on the stock. “Content is no longer a competitive advantage,” especially with traditional 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 competitors including Disney Plus, AT & T’s HBO Max, Apple TV Plus, Amazon Prime, ViacomCBS’s Paramount Plus and others. The FT has estimated that eight US media companies will spend $ 140 billion on content this year as power wars escalate, and analysts expect spending to double in the next few years.

Investors seem to be waking up to the high cost of the streaming business – and the often short shelf life of content on the services. Following the Netflix report, analysts at MoffettNathanson noted that the “decay rate” of streaming content was “incredibly fast”, especially when popular programming could be struggled in a single night.

This means that “streamers must continually spend on new content to grab and keep new members, with any slowdown in that spending resulting in a softer quarter” for subscriber growth, the firm said in a research note.

“We question whether streaming is a good business or not,” says Michael Nathanson, an analyst at the firm. “It takes a ton of fresh content.”

Netflix said its higher content spending compressed operating margins to 8 percent in the fourth quarter, 6 percentage points lower than a year earlier. To significantly increase its margins would mean spending less on content, which many consider unlikely given the intensity of competition in the streaming market.

Netflix has raised its prices in the US this month to $ 15.50 per month from $ 14 – a premium to the $ 8 per month that Disney Plus charges. Netflix officials stressed last week that the number of subscribers declined in the fourth quarter, and they said plans to break even this year and become free cash flow positive are on track.

Netflix, Disney and other streaming companies suffered major subscriber increases during the 2020 restrictions, but a return to more normal routines slowed growth.

The company blamed the disappointing subscriber growth in part on “macroeconomic hardship in various parts of the world”, especially Latin America. It said competition “could affect our marginal growth”, a rare recognition that it is under pressure from other streaming services. But it added that it continues to grow in every country in which its competitors started.

Netflix CEO Reed Hastings said it was difficult to determine the cause of the slowdown because “Covid brought in so much noise”.

But Martin said Netflix underestimated the impact that increasing competition had on its subscription growth. “Part of the problem is that Netflix does not think they have a problem,” she said. “I have come to the conclusion that competition is real, but they have not yet come to that conclusion.”

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

“Three [streamers] must go bankrupt and three must survive, ”she said. “And then content can become more reasonable in terms of its price.”

In turn, Hastings said there was no reason to question the company’s job. “We remain calm,” he said.

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