Netflix's dominance in a crowded streaming market may be showing signs of waning, but chief executive Reed Hastings isn't worried about Disney Plus or any of the other streaming services nipping at its heels.
"Our largest competitor for TV viewing time is linear TV," Hastings said on Tuesday's earnings call. "Our second largest is YouTube, which is considerably larger than Netflix in viewing time. And Disney's considerably smaller."
Netflix's subscribers now number 208 million, more than double Disney Plus, its closest on-demand video subscription competitor.
Still, Netflix undershot its quarterly subscriber forecast for only the second time since the final quarter of 2019. With 4 million new subscribers, the 2 million shortfall was its second largest since 2016.
Chief financial officer Spencer Neumann ascribed the miss to COVID. He pointed to the "pull forward" of new subscribers in 2020 that led to the company's record growth last year and the simultaneous push back of key title launches into the latter half of 2021.
"It's super hard to, obviously, forecast quarterly subscribers in a typical quarter for us, and particularly hard in this particular environment," he said.
Sex Education Season 3 Announcement | Netflix www.youtube.com
Netflix also revealed it plans to spend $17 billion on content in 2021, up from $11.8 billion in 2020 and $13.9 billion in 2019.
The company highlighted the ongoing growth of streaming in general and its strong content slate in 2021 as signs for longer-term optimism. New launches in the second of this year will include returns of popular shows "Sex Education", "The Witcher" and "Casa de Papel" along with new original films including "Red Notice" starring Gal Gadot and Dwayne Johnson and "Don't Look Up" featuring Leonardo DiCaprio, Jennifer Lawrence, Cate Blanchett, Timothée Chalamet and Meryl Streep.
With 35 Oscar nominations, Netflix continues its foray into film supremacy. As for its cinematic ambitions, Hastings said he believes his company has a lot of room to grow.
"We've been doing series longer and we're more dialed in about what is really big and what hits," he said. "We're getting there on film. Also on animation. Also on kids. Each of these have their own experience curve that we're progressing down."
Netflix's share price was down about 8% in after-hours trading on news of the subscriber miss and tepid expectations for the second quarter, predicting 1 million net additions, compared to 10 million in the same period last year. Hastings' worries about YouTube are well-founded. A study out earlier this week found that Gen Z is the only generation that ranks browsing the internet and engaging on social platforms higher than watching TV or movies at home.
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Hollywood is on notice: Gen Z would rather scroll through social media, play video games and stream music than watch TV or catch a film.
That's a remarkable shift from earlier generations – who still prefer to kick back and watch a screen – and poses serious challenges to traditional media, according to an annual survey of digital trends by Deloitte.
Asked to choose their favorite entertainment activity, the top response among Generation Z, was video gaming (26%), followed by listening to music (14%), browsing the internet (12%), engaging on social platforms (11%) and then watching TV or movies at home (10%).
Administered in February as the pandemic was raging, the survey of more than 2,000 U.S. consumers reflects the rising popularity of gaming across ages but most starkly highlights the digital divide among generations.
"Media companies and advertisers may still be video-first, but younger generations may not be," the report said.
Of the Generation Z respondents, defined as those born between 1997 and 2007, 87% play video games daily or weekly, on smartphones, consoles or computers. And while a majority of the respondents, including millennials and Generation X, said video games have helped them stay connected to others during the pandemic, they see entertainment differently.
For all other generations (Millennials: born 1983-1996; Gen X: 1966-1982; Boomers: 1947-1965 and Matures: 1946 and prior), kicking back and watching the tube came in as the number one entertainment option.
Here are some additional takeaways:
- 82% of U.S. consumers have at least one video streaming subscription
- The average subscriber pays for four services
- Cost is the most important factor for deciding whether to subscribe to a new streaming service, followed by content selection
- 52% find it difficult to access content across so many services
- 53% are frustrated by the need to have multiple service subscriptions
- 40% would prefer to pay $12 a month for an ad-free video service, while 60% said they'd accept some ads for a lower fee.
- Streaming music subscribers pay for an average of two paid music services
- 45% would rather pay than have ads for their music streaming; 67% of millennials would prefer to pay
- 67% don't trust the news they see on social media
- 55% pf Generation Z and 66% of millennials say social media ads influence their purchasing choices versus 49% of Generation X and 13% of boomers
- 40% would be willing to provide more personal information to receive more targeted ads
- 62% of Gen Z and 72% of millennials would rather see personalized ads than generic
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With more than 200 million subscribers and intense competition from the likes of Disney and HBO Max, can Netflix keep its big lead in the streaming wars?
Financially, Netflix has never been better off. It has forecast its cash flow to break even in 2021. If it does, that would eliminate, for the first time, the company's need to raise external financing for its day-to-day operations.
That's in part because the company raised its subscription price last year, by $1 for the standard option and $2 for premium, and still added a record 37 million new subscribers. But as the pandemic winds down and competition heats up, it's unclear whether it will be able to sustain the pace.
According to analytics firm JustWatch, Netflix's market share in the U.S. is already on the decline.
And the debt that has financed much of their enormous content library looms. In its most recent earnings report, the company's balance sheet showed nearly $8 billion due within one year, and an additional $20 billion further down the road. Flush with cash, however, it recently pledged to cut its debt load to a sustained level of $10 billion to $15 billion.
The question now is how Netflix can wind down that debt while simultaneously growing its revenues. Having already expanded to over 190 countries, there are few new markets to tap. Can Netflix squeeze more subscribers out of its current markets? Or might it continue looking to squeeze more out of existing subscribers' wallets?
At its earnings call on Tuesday, Netflix may offer some answers on how it plans to keep ahead of the pack. Analysts see the streamer, whose shares are trading near record-high levels, at a pivotal moment. Here is what some of them are expecting ahead of the first-quarter earnings call:
Shrinking Profitability in the Short-Term…
One reason why Netflix's financials were so strong last year is that the pandemic forced it to reduce spending on content production. Subscribers piled in anyway, and the company was able to make up for some of the shortfall by leaning into animation. But in the near-term, that slowdown may have consequences.
"We believe that the leaner content pipeline going into 2021 could very well influence subscriber growth," wrote Moody's analyst Neil Begley in his most recent note.
...But Long-Term Growth
Although Netflix is likely to increase the billions of dollars it already spends on making and buying shows and films, analysts still believe it's poised for profitability by next year.
"We know that the company has launched in every market, and that original content investment reached a tipping point in 2020," wrote Justin Patterson and Sergio Segura, analysts at KeyBanc Capital Markets, in their most recent Netflix note. "Even with healthy reinvestment in content, we believe this positions the company toward sustainable [free cash flow] generation beginning in 2022."
Moody's analysts also expect Netflix to continue adding subscribers over a longer period, projecting the streamer to hit 250 million subscribers globally by late 2022.
Higher Quality Programming
Most analysts think Netflix is likely to increase the quality of its programming.
Michael Pachter and Alicia Reese, analysts at Wedbush Securities, pointed to Netflix's recent licensing deal with Sony, which will give the streamer exclusive rights to Sony's films after their theatrical and home entertainment runs for five years, starting in 2022. Netflix will also get first-look rights on Sony's direct-to-streaming content, some of which it has pledged to produce.
"While the financial terms were not disclosed, it has been widely reported that Netflix will pay over $1 billion for the deal," they wrote in their most recent Netflix note. "This is meaningful for Netflix as many of its earlier exclusive licensing deals have expired, the content pulled back by studios such as Disney to shore up their competing streaming services."
Improving the quality of its content should allow Netflix to increase prices, KeyBanc analysts wrote. This past year's hikes didn't seem to repel customers, suggesting they may yet be willing to pay more, despite the many alternatives consumers now have.
But Maybe a Future Market Sell-Off?
Despite Netflix's strong 2020, Wedbush analysts called it overvalued and issued a price target of $340, nearly 40% below its current level.
"We have been consistently wrong about Netflix, but optimism about the company's potential to generate free cash flow growth of more than $1 billion per year [which, they note, is what the company's current valuation implies] seems to us to be misplaced," the note said.
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