The welcome "U Turn" from Netflix

Congratulations to Netflix for battling it out in the global streaming war. An encouraging Q3 nos released yesterday. The key callout is that Netflix has been able to arrest the subscriber de-growth and has reported a 2.23 million growth in the quarter. 

Global Outlook

Let's first look at how has been the trend of their subscribers globally

The streaming market was one of the main gainers of the global lockdowns during the pandemic. The subscriber nos of Netflix saw a steep up stick from Q1 2020 and grew at an avg of 25% over the same quarter 2019, this trend remained throughout the year in 2020. 

This was also a period when a major competitor launched taking advantage of the robust streaming market at that time. Some of the major launch during the 2020 are Disney+ (Nov 2019), HBO Max (May 2020), Peacock (July 2020) .

In the turn of the new year in 2021,  Netflix growth trend kept up at a slower pace than 2020, at 10% over the same quarter 2020. The restricted movement of the lockdown aided in the growth keeping up. 

Early 2022, the competitors had geared up and took out their knives, the movie studio driven competitors such as Disney, HBO, Peacock, Paramount Plus etc started pulling out their content from the Netflix platform and also made significant investment on content to take on the might of Netflix and Amazon Prime.   This heightened competition led to Netflix having a poor Q1 & Q2 2022, a loss of 1.2mn subscribers across the two quarters.   This makes the growth in subscribers nos in Q3 2022 that much more significant to Netflix’s business.

Regional Outlook

Taking a look at the regional trend one notices that the North American market (US & Canada) where much of the competition has been active, Netflix is getting challenged significantly.   Financially this is the most lucrative region for Netflix generating US$16.37 per subscriber.

EMEA as a region has been growing. This region has some headwinds when it decided to pull out of Russia on the aftermath of Russian action in Ukraine in Q1 2022.  EMEA generates US$10.81 per subscriber

APAC is a market is experiencing consistent growth quarter on quarter over the period. China and North Korea are two markets in this region where the service is not available. Australia, Indonesia and India are the major markets in the area. This region is poor in its yield per subscriber at US$8.34 per subscriber.

Business Outlook

Revenues for the year 2022 are strained due to the competitive environment.

Netflix is executing two strategic shifts that it hopes will rev up  its revenue base

1.    The first is rolling out a tier of ad-supported content, which will help increase the average revenue per subscriber.  It  planned to begin launching the tier in Nov 22, at a charge US$6.99 a month.  Initial interested in this is very strong among the advertisers and has the potential of strong revenue earner.

2.    The second change is cracking down on password sharing and getting viewers who are sharing accounts to pay to do so.  In addition it plans to make it easier for people who share their accounts by creating “sub-accounts” or “extra members” if they wish to pay for family or friends.  This is in beta in some LATAM markets and plan a full roll out in early 2023.

With a significant international revenue, the strengthening of the dollar is also having an impact on its operating margin. The operating margin has dipped from 23.5% in 2021 to 19.3% in 2022 so far.  The negative impact due to foreign exchange is expected to continue in Q4 of 2022 as well.

Content

Netflix has made some significant content roll out, including “Stranger Things”, “Dahmer Monster: The Jeffrey Dahmer Story,” “Virgin River” “Cobra Kai,” as well as films including the “The Gray Man,” “The Sea Beast” and “Purple Hearts.”

Non-English-language programming that drew large audiences during the quarter included South Korean series “Extraordinary Attorney Woo” and thriller “Loving Adults” from Denmark.

My take

Challenging moments for the Netflix team pressure from competition, consumers enjoying more options and preferring the streaming services for short term based on the content or the sports season. Making the streaming business that much more challenging in the years to come.