Netflix’s Mixed Earnings Give Hollywood a (Short) Chance to Exhale | Analysis

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Hollywood is breathing a collective sigh of relief — for now.

Netflix lost almost a million customers in three months time, and then warned Wall Street that the current financial quarter’s new signups will fall 800,000 short of expectations. It was the largest subscriber defection in the company’s history. And that was good news considering the streaming giant originally projected two million subscribers would dump the service.

Reed Hastings, the streamer’s co-chief executive, almost seemed embarrassed on the company’s quarterly analyst call that there was “excitement” at the “less bad results.” And stock traders turned nervously exuberant by lining up buy orders on Netflix that indicated an 8% pop ahead of Wednesday’s market open.

But…

“It really means little to nothing and Wall Street needs to better understand if this is sustainable,” an executive at a rival studio told TheWrap. “This isn’t enough to just get things back on track.”

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Indeed, Netflix exerts a gravitational force on the entertainment media industry. Investors took Netflix quarterly earnings as an opportunity to snap up shares of rival studios with streaming ambitions, sending The Walt Disney Company, Warner Bros. Discovery and Paramount Global all sharply higher in pre-market trading.

Talking heads on financial news stations were even pinning the better-than-expected Netflix subscriber loss as a reason why tech-fanatical Asian markets opened broadly higher in overnight trading. The Asia Pacific region is Netflix’s biggest growth market with subscriber additions in five consecutive quarters, including 1.08 million adds in the second quarter.

Yet questions remain on exactly how long Wall Street and Hollywood will celebrate losing only 970,000 customers in the second quarter and forecasting an addition of only a million worldwide subscriptions in the current period. The projected return to growth, as well as the looming addition of a revenue-generating ad-supported tier in 2023 and plans to crack down on password sharers, has stopped short this year’s 70% slide in Netflix stock price.

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Analysts will now spend the next few weeks parsing through the earnings data for all of Hollywood, starting with Warner Bros. Discovery — its first earnings as a merged company — in August, to determine if Netflix is a blip on the radar and other companies’ results can continue fostering long-term confidence in the streaming market. Or if Netflix, whose 220 million worldwide subscribers is double second-place rival Disney+, is showing that the streaming market has gone limp.

“If the market-leader is adding subs right now and plans to add the rest of the year, it’s great news for competitors,” said Sarah Henschel, an analyst at market research firm Omdia, referring to Netflix’s projected 1 million subscriber growth in the current quarter. “It’s an all ships rising opportunity.”

To be sure, Netflix posted 30% more cash flow from operations year-over-year — and did so despite the strong U.S. dollar devaluing revenue gained from overseas subscribers. Netflix’s letter to shareholders said the company would focus on its streaming content intently, and push aside other revenue streams to continue focusing on the user experience.

“This freedom means we can offer big movies direct to Netflix, without the need for extended or exclusive theatrical windows, and let members binge-watch TV if they want, without having to wait for a new episode to drop each week,” the company said in its quarterly shareholders letter.

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But still the company needs to deal with every major Hollywood studio gunning to poach their subscribers. This is compounded by the fact that inflation is causing some customers to make a hard choice — keep Netflix (which at nearly $16 is the industry’s most expensive streamer) or switch to a cheaper alternative that might have advertising.

Netflix also said it’s not considering raising this year’s content spend beyond $17 billion (which is what the company spent in 2021), and Chief Financial Officer Spencer Neumann said the amount would remain in “the same zip code” for the next few years.

But Eric Steinberg, an analyst with entertainment and data analytics firm Whip Media, points out that what they use their content budget on may be part of the problem. He said Netflix is relying too much on established hits like “Stranger Things,” which is scheduled to have only one more season, instead of “refreshing their slate with new ones.”

“Outside of ‘Inventing Anna,’ a miniseries, Netflix has not had a new hit this year that has really permeated the culture,” he said.

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That’s not good news, at least according to data compiled by independent analysts.

A recent poll by Recurly, a consumer platform that manages and monitors subscription payments, showed 31% of respondents planned to cancel some subscription services this year. And, 46% of U.S. consumers have already canceled services due to price increases last year.

Recurly’s research also stated that “for millennial and Gen Z consumers, 44% said access to exclusive and compelling content or services is a major driver for subscriptions.” That means they came back to Netflix for shows like “Stranger Things,” but still leaves the question of what’s next in retaining them and luring new subscribers.

“Consumers are going to get more selective, more picky and more intentional with streaming budget picks each month and we will see across the industry increased bundling and aggregations that brings simplicity and discount price,” said Paul Erickson, a streaming market analyst from data research firm Park Associates.

“It doesn’t necessarily mean their oxygen is exhausted in terms of the [subscription video on demand] market,” he said. “There’s a limit on subscription growth for everyone. We have yet to see where the wall is.”

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