Netflix Big Revenue Moves Start To Pay Off, But Time Still Needed

With most of Hollywood shut down thanks to simultaneous actor and writer strikes and a continuing industry inability to make money from streaming, Netflix used its earnings Wednesday to flex loudly about the ways it’s making even more money.

Yes, investors pounded the stock almost immediately after earnings were announced after market close on Wednesday. Shares dropped by around $55, or 11%, from a week’s high of more than $481 a share.

That’s a big pop in the mouth, though it’s useful to remember even a price of $426 or so is more than double the worst lows of just last year, after the company’s disastrous Q1’22 earnings call announcing it had lost a few hundred thousand subscribers, and expected to lose more in last year’s second quarter. So, even 11% down still looks way up in just 14 months.

Investors’ main bugaboo this time around may have been a modest miss on expected revenues, an issue that similarly bedeviled shares of fellow sector pioneer Tesla when it reported quarterly earnings at almost the same moment this week.

But in focusing on that number, investors may have been missing the forest of green ahead for Netflix (and Tesla, though that’s for another story).

Just before earnings were announced, several outlets noted that Netflix had quietly killed off its lowest-cost ad-free tier, $10.99 a month, for new or returning U.S. subscribers. Those who already have the plan are still grandfathered in but newcomers are left with either the $6.99 a month ad-supported tier, or one of two ad-free options, with the $19.99 “premium” option providing ultra HD streams on up to four devices simultaneously.

Killing off the cheapest ad-free tier will both simplify the pricing structure, and likely encourage bargain hunters to jump on the ad-supported tier, where Netflix can better monetize them with a heftier addressable audience for advertisers.

At the same time, there are signs that the company’s long-in-coming crackdown on password sharing is paying off. Before announcing the “paid sharing” initiatives, the company had an estimated 100 million passwords shared by far-flung families, former roommates, exes, and the like.

In the latest quarter, paid sharing finally hit most of the Netflix audience. It’s no coincidence the company also reported 5.9 million new subscribers, roughly triple what the company had guided for and one of the best quarters in its history other than the lockdown-fueled craziness of 2020.

“In May, we successfully launched paid sharing in 100+ countries, representing more than 80 percent of our revenue base,” the company said in its latest investor letter. “Revenue in each region is now higher than pre-launch, with sign-ups already exceeding cancellations.”

The remaining 20% of the company’s subscriber base is getting paid sharing’s restrictions as of this week, which should further boost subscriber signups going forward.

And it makes sense that signups would rise with little effect on normal cancellation rates. After all, just because that former roomie or 26-year-old relative has to be cut off the home account (or converted to a $2/month remote add-on) doesn’t mean the main subscriber walks away too.

It just means the out-of-home password user must decide whether Netflix truly is the entertainment equivalent of the electric or water bill, a moderately priced entertainment utility that they pretty much have to have.

It’s worth noting that all this is happening with only minimal impact so far on average revenue per user, from $16.18 to $16. ARPU is one of those metrics that Wall Street generally overlooked in streaming’s 2020 gold rush, but that now has become paramount.

Netflix has been slagged, especially by competitors, for offering too many unremarkable shows. But it’s also serving up some keepers, as shown by a Nielsen statistic that says Netflix had the top U.S. series 24 of 2023’s first 25 weeks, and the top movie for 21 of those weeks.

The company’s real advantage, however, is providing an array of good-enough shows on a regular basis, including content for local audiences and languages in all those global markets it serves.

Competitors that focused on a relatively few home run shows, which generally are accompanied by more than a few expensive strikeouts, haven’t done as well in overall viewership and churn rates, even as they’ve collared awards and cultural cachet.

For instance, HBO Max successes like Succession and Euphoria attracted plenty of attention and awards but not huge subscriber bases or reduced churn. Perhaps the addition of Discovery’s reality programming in what’s now called Max will provide a steadier, more cost-effective appeal to a broader subscriber base.

Netflix’s steady drumbeat of programming, on a long pipeline drawing programming from 40 production centers around the world, positions the company well for what’s looking like a very rough next few months for the rest of the industry.

The U.S. actor and writer strikes look unlikely to be solved quickly, with both unions seeking, among other things, far more transparency in the streaming model and real protections from potential job depredations by artificial intelligence tools. The studios, by contrast, have shown little openness to fixing the thorny issues contained in union bargaining demands.

A prolonged standoff beyond, say, Labor Day presages a potential doom loop for legacy cable and broadcast outlets, accelerating what’s already been a rapid increase in cord-cutting with its concomitant impacts on ad revenues and carriage fees.

Normally, fall programming is being taped now for debuts in mid-September. CBS already this week announced a rejiggered fall lineup heavy on reruns, game shows and reality competitions. If the network could put the NFL on air 48 hours a day, it probably would, as would its broadcast competitors.

Regardless, an extended strike will hammer ad revenues for broadcasters and likely lead to the closure of many of the smaller cable channels that have been scuffling around at the bottom of program guides for years now. Cable providers will further shrink their offerings to save money, and focus on the most-watched networks.

And of course, on the eve of the actors strike, CEO Bob Iger signaled Disney’s openness to deal proposals for ABC and other linear channels, which operate in what he called “a broken” business model. Iger also said he’s looking for partners to help run ESPN’s still-lucrative sports business. Comcast is similarly thought to be open to deals for NBCUniversal’s many legacy businesses.

Netflix, by contrast, is looking at a big boost in its free cash flow during the production shutdown (as are its money-losing competitors), because of reduced deal flow and halted productions. Netflix said its projected FCF will now swell to $5 billion this year, up from previous estimates of $3.5 billion.

All of which puts Netflix in even more of a prime position for a lucrative fall season, regardless of this week’s big drop in share prices. The key, however, is that the benefits of both paid sharing and a broader ad-supported tier are beginning to manifest as Netflix evolves into a different, more broadly configured media company.

“We expect that our revenue growth will accelerate more substantially in Q4’23 as we further monetize account sharing between households and steadily grow our advertising revenue,” the investor letter says.

The company acknowledged that it has “more work to do to reaccelerate our growth.”

But a lot of that work is in place. It just needs a bit of time to be fully realized. Time is something Netflix has plenty of, unlike its competitors grappling with Wall Street profit expectations, the twin strikes, and looming decisions on their many legacy operations.