Netflix Throws Down the Gauntlet With a Big Q3 Comeback: Your Move, Disney
Netflix basically just delivered a message to rival Hollywood streaming platforms: “Hold my beer.”
Wall Street is diving back into the world’s largest streamer on Wednesday after it crushed third-quarter earnings, posting better-than-expected results across the board. Profits and revenue beat analyst projections, and the number of new subscribers had investors salivating after two straight quarters of declines. The news led one entertainment industry analyst to proclaim “STREAMING IS ALIVE” as shares catapulted more than 16% in after-hours trading.
The Los Gatos, Calif.-based company roiled the streaming industry by hemorrhaging customers during the first half of the year. Now, Netflix is literally taking swipes at rivals Disney, Warner Bros. Discovery, Amazon and Paramount after finally getting its house in order.
Co-chief executives Reed Hastings and Ted Sarandos threw down the gauntlet in their quarterly letter to shareholders, taking aim at anything with a plus sign after its name. “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard — we estimate they are all losing money with combined 2022 operating losses well over $10 billion vs. Netflix’s $5 to $6 billion annual operating profit.”
“Well, thank God we’re done with shrinking quarters,” Hastings said while laughing during the company’s earnings call.
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The insinuation, of course, is that competitors may not be able to make similar boasts as they unveil results during the next few weeks. Amazon, Apple and Comcast’s Peacock platform are on tap next week to deliver results, followed by WBD, Fox, Lionsgate, Paramount and Roku the week after.
But everyone in Tinseltown knows who Hastings and Sarandos are really trying to rattle: Walt Disney Co. CEO Bob Chapek. The Hollywood heavyweight is set to release both fourth-quarter and full-year earnings on Nov. 8 — and the Disney has already tempered expectations that results may not come in as high as previously expected.
Both entertainment giants are locked in a battle royale for streaming supremacy.
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Netflix, which added 2.4 million subscribers during the third quarter to a total of 223.09 million globally, rolls out its ad-based subscription tier for $6.99 a month in November. Disney has about 221 million subscriptions across its bundle of services, and plans to offer a lower-priced advertising tier for Disney+ in December for $7.99 a month.
“It’s a new era of competition in streaming and the race is on to create the right offer, for the right subscriber, at the right time,” said Tien Tzuo, chief executive of Zuora, a software company that helps companies manage subscription-based businesses. “Netflix’s new ad-tier is a good start, but they still have to work at being more nimble and dynamic with packaging and bundling to continue competing with the likes of Disney and HBO.”
Certainly, Warner Bros. Discovery is lurking in the background as CEO David Zaslav cobbles together what can be a formidable challenger for both Disney and Netflix. Combining HBO, Discovery, and CNN’s news coverage is a priority at the nation’s No. 2 entertainment company. HBO Max and Discovery+ boasts 92 million direct-to-consumer video streaming subscribers, with plenty of room to scale up once content is bundled under one platform.
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But Netflix also hopes to break away from its younger rivals by cracking down on users who are sharing passwords, hoping to turn the freeloaders into paying customers. Research firm MoffettNathanson estimates that 16% of Netflix users are lending their passwords to friends and family, and in April the streamer projected that about 100 million non-paying households are ripe for conversion.
On Monday, Netflix announced plans to crack down on password sharers, allowing them to keep all their old settings and favorites when converting to paying customers. So, if every single one of them decides to write a monthly check of $6.99, Netflix could be sitting on untapped revenue of about $700 million a month or $8.4 billion a year.
“With 223 million subscribers and a huge lead on the competition in almost every major market, Netflix still has a lot of room to grow and capture the share in a price-sensitive market,” said Haris Anwar, senior analyst at Investing.com “That means more growth opportunities from the company’s ad-supported service and its password-sharing initiative. If done successfully, these actions can accelerate revenue growth in a material way and easily make up for any revenue shortfall coming from the lower pricing model.”
For the moment, investors are energized that the industrywide panic Netflix caused by losing about 1.2 million subscribers during the first half of the year may have been overblown. The streamer’s fourth-quarter guidance also doesn’t look too shabby, with predictions of 4.5 million new subscribers (though that’s still a 46% decrease from the 8.3 million subscribers it added during the same period last year).
The rally in Netflix stock price pumped up all of its competitors ahead of Wednesday’s opening bell on Wall Street. But that might prove to be very short lived by next week. Enjoy the optimism while it lasts.
Additional reporting by Brian Welk.
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