With Netflix’s Big Drop, Do Other Streaming Services Change Course?

The brutal plunge in share prices that hit Netflix after last week’s so-so earnings announcement is sparking broader questions about the economic underpinnings of the entire streaming-video sector. 

Projections in recent weeks suggest the streamers plan to add an additional $10 billion in 2022 above 2021’s $230 billion programming spend. In 2021, that spending contributed to a record 559 new scripted shows across all outlets, according FX Network’s annual body count. 

Should these companies keep spending billions more on original programming than they’re making in subscription revenue just to build market share (amid a bunch of competitors pursuing the same budget-busting approach)? 

Or… should they trim the sails, pull back on content spending as subscriber additions moderate, investors cool, and viewership succumbs to the distractions likely to emerge in a post-pandemic world?

It’s an increasingly urgent question after the stock market beating Netflix took when it reported a modest miss on expected subscriber adds (during its biggest quarter ever for hit series and movies), not to mention a big miss on margins. Perhaps worst of all was the substantially smaller subscriber growth estimated for this quarter. 

Shares on Friday plummeted nearly 22%, part of a broader market collapse that had begun earlier in the week, and continuing into this one. 

Perhaps the market would have been more forgiving in mid-pandemic, when the company had the halo of tens of millions of “pull-forward” new customers. But it certainly received little grace from investors this past week.

Share prices closed Tuesday at $366.42, after briefly topping $700 in November. That’s a gut-wrenching 47% fall in just three months. And it comes even though the service racked up record viewership for star-studded movies Red Notice and Don’t Look Up, and the surprise hit series Squid Game out of South Korea.  

The question is… what’s next for Netflix, which still projects it will reach cash-flow positive status this year and thereafter, after slipping slightly into the red in 2021? Analysts LightShed Partners, for one, suggested before Thursday’s earnings announcement that Netflix consider a rethink if it can’t return to the consistent growth in subscriber adds it had seen pre-pandemic.  

“If overall subscriber growth does not begin to reaccelerate back into the low-mid 20 million range (as we believe it will, see our #Top22for22), should we look for a moderation in content spend growth,” the analysts wrote. “Or do you believe pricing power is enough to support increased content spending?”

A Bank of America analyst report issued Tuesday said the company likely will need considerably more time to reach its own subscriber goals, and investors should adapt to projections of noticeably lower earnings this year and beyond.

“We update our price objective to $605 from $750 based on our peak penetration valuation model,” the report says. “We updated our peak penetration model as we see Netflix requiring a longer timeframe to reach peak penetration. We assume UCAN [United States and Canada] subscribers of 82 million in 5 years (vs. 80 million in 4 years prior) and international subscribers of 300 million in 14 years (vs. 380 million in 10 years prior).”

This week, Netflix notified U.S. customers that they will see bills rise as much as $2 per month (11%) on the top-end plan, beginning Feb. 25. That’s not a backbreaker, especially amid broader inflationary increases. 

But it puts Netflix among the most expensive streaming offerings, albeit with the most extensive new offerings. Can it continue to maintain that pace of output (and expenditure) if the subscriber base doesn’t keep growing toward a TAM of 600 million to 800 million worldwide customers?

The questions are perhaps even thornier for Netflix competitors, especially those without benefit of a stream of cash from some other part of a giant technology company, such as what undergirds the hefty content spends at Apple TV Plus and Amazon Prime Video. 

Apple, for instance, is showcasing the remarkable talent lineup for its increasing library of shows with an amusing new commercial featuring Jon Hamm, who impatiently scrolls through all the stars on those series and features, and finds “Everyone but Jon Hamm.” And it certainly seems to be true, given the company’s lavish use of its seemingly bottomless checkbook to sign the biggest names for projects. 

That approach will be difficult for others to consistently mimic, and Wall Street is noticing. 

Disney, Roku, and ViacomCBS have seen share prices drop nearly as much as Netflix over the past few months, as investors began looking at streaming expenditures as more than just a bet on the future. 

Disney in particular has been getting beaten up in the markets since CEO Bob Chapek warned in October that growth in the second half of 2021 would be quite modest. Shares are off nearly a third from last year’s high of $203.02. They closed Tuesday at $136.51 apiece. 

With saturation looming in the United States, all the services will need to see more international growth to keep pace with promises made in 2020 and 2021. 

The newly pressing questions facing all the streaming companies are particularly problematic for the planned merger of AT&T unit WarnerMedia with Discovery. The Warner Bros. Discovery deal faces increasing regulatory scrutiny already from hawkish antitrust regulators. Investors may soon join the pushback party. 

For one, Wall Street Journal columnist Holman Jenkins savaged the proposed merger on its merits, writing this past week that the wireless carrier chose an “inferior partner” to spin off a crown jewel it had acquired only three years earlier. 

The reason for choosing Discovery, Jenkins wrote: because it posed the least regulatory risk, not because it brought much of anything to the table on its own. 

And the reason to spin out WarnerMedia at all? AT&T executives couldn’t fund the company’s existentially important 5G network rollout, continue feeding HBO Max’s programming maw, and still pay a dividend that has kept a reliable class of investors value trapped for decades in the stock. 

But finding new investors might mean a push by those investors to find new managers of AT&T too, managers perhaps with a background in growth companies. Instead, AT&T managers opted to dump and run, Jenkins wrote.

Those hawkish regulators could still save AT&T from its latest poor M&A move, but they can’t fix the bigger questions facing all the Hollywood media companies. How much can they spend while building a big enough business and market share to create a sustainable future? 

There are some reasons for long-term optimism. A just-released study by market research platform Lucid found 56% of respondents considered CTV and streaming services more cost effective than TV, and 52% prefer them over cable TV. Three in five have at least one service they watch daily, though nearly half (47%) still watch cable TV daily. 

It’s not a ringing endorsement, but suggests over time, as the cable TV bundle continues to erode, and streaming services improve their user experience and cost-value ratio, that the bulk of audiences will end up using streaming for most of their entertainment (and news and sports, if recent deals on both fronts is indicative). 

But how long will it take to get there, and can the second-level services make the transition with no more than a modicum of pain and dislocation? That’s what all the companies must be asking as markets continue their choppy, mostly southward migration this season.