NETFLIX's 27% overnight stock drop explained, and why an Ad-supported version is on the way

NETFLIX growth train stalls

Netflix’s new business consultant. via Giphy

SUBSCRIBERS: Now at 221.6 Million global, that’s down 200k from Jan.

• Their RUSSIA exit dropped 700k subs, otherwise Q1 would have been +500k, so call that what you will. But - as they were projecting to add at least 2.5 Million Q1 subscribers…

• AND they are projecting to lose 2 Million subscribers in Q2, marking their first real quarter of subscriber loss in 11 years - yeah the 25% stock price dive thing is making more sense (if not a bit extreme).

REGIONAL BREAKDOWN:

• US / CAN: 74.6 Million (-640k since Jan - #pricehike)

  • AVG REVENUE PER USER #ARPU: $14.91 (+5% vs a year ago)

• EUROPE + MIDDLE EAST: 73.7 Million (-300k)

  • ARPU: $11.56 (this has pretty much been the same for a year now)

• LATIN AMERICA: 39.6 Million (-350k)

  • ARPU: $8.37 (+13% vs a year ago)

• ASIA PACIFIC (incl INDIA): 33.7 Million (+1 Million)

  • ARPU: $9.21 (-5% vs a year ago… likely due to INDIA price cuts to grow subscribers)

All of those ARPU’s are the biggest in the business, often by a large amount.

And unlike every other streaming service… NETFLIX is continually making Billions while competitors are projecting to lose Billions for the forseeable future 👇.

Q1 REVENUE: $7.8 Billion. $1.6 Billion was profit (down $200 Million from Q1 2021), but the revenue growth rate is slowing (under 10% year-over-year).

• #FunFact: General admin costs (salaries, expenses etc) were up 33% in a year to $397 Million.

SO: THE PASSWORD SHARING GRAVY-TRAIN IS OVER

Not immediately… but expect a crackdown to roll out over the next 12-18 months.

NETFLIX estimates 100 Million accounts share passwords (almost half of their subscribers), with 30 Million alone in the US & CANADA. #U.S.A.!U.S.A.!

They say this hasn’t changed much over the years (ie the percentage has been about the same over time), but as subscriber growth is now mostly saturated (except for ASIA)… yeah it’s a problem they’re going to finally confront.

Though likely by upcharging people a couple bucks a month to share their passwords vs. just blocking people from doing so.

AND: ADS ARE COMING

Expect an ad-supported version of NETFLIX (at least in the US) by likely 2024, if not late 2023 depending how things go in the next 12 months. Here’s Reed Hastings:

“Allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense.

So, that’s something we’re looking at now, we’re trying to figure out over the next year or two. Think of us as quite open to offering even lower prices with advertising as a consumer choice.”

No real details available yet… although if you’re an Ad exec at WARNER DISCO concerned about all the “cost efficiencies” talk - this is very welcome news.

TAKEAWAY

Yeah… this is a bad time. A definite inflection point for the company, with the real damage still 3 months away with the projection of losing 2 Million subscribers from now thru June (no guidance given for the 2nd half of the year).

Plus I think as we’ve all come to realize, inflation has only just started to manifest its effects. And even NETFLIX seems not to know how the password crackdown will go in terms of subscriber loss/gains.

But if other streaming services are a good indication, an Ad-Supported tier can do wonders - some streamers (HULU, DISCO+) make more $$ per month from their Ad-Supported subscribers than the Ad-Free ones. So even if a lot of people shift to the Ad-Supported tier in a couple years, it could be a boon for NETFLIX in the mid-2020s:

• Which will be right about when the HBOMAX subscriber count will kick into a one-time overdrive… as their HBO SKY output deal ends and HBOMAX will likely launch in EUROPE’s biggest territories (UK, GER, FRA).

• And about when DISNEY has to buy out COMCAST’s stake in HULU, likely causing big changes there as well (including the launch of an ad-supported tier for DIS+).

While NETFLIX will still spend, the purse strings are now going to tighten (or at least stop expanding), and this combined with Zazlav’s statements that a similar tactic will take place at HBOMAX - the peak era of streaming spending may have just peaked at 2 of the 4 largest buyers.

Cue the bottomless checkbooks at AMAZON & APPLE TV… AND: Just an outside long-shot thought here - Which major company:

• A) knows advertising better than anyone

• B) has a bottomless checkbook for both a big acquisition and huge content spends to compete with AMAZON and APPLE TV

• C) has a large, global presence

• D) does not have a premium streaming service?

It rhymes with GOOGLE. Ok yes, it’s GOOGLE.

- SEAN MCNULTY - connect with me on LINKED-IN here

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