1. Netflix’s Murky Q2 Numbers

Netflix posted a whopping 5.9 million new subscribers in Q2 2023, beating expectations. They attributed much of that growth to their ballyhooed (I love that word) password crackdown, though did not provide any, you know, numbers to support it. More of a “take it on faith” kind of thing.

While the source may seem somewhat obvious, given that they did not really have any major hit series of the sort that traditionally drive new subscriptions during that period, Wall Street likes to see actual numbers.

And Netflix did not give them many.

No word on what percentage of password-sharing households were targeted in the recent crackdown. (Not even a vague stat like “most” or “some”) No word on which plan those reformed password sharers gravitated to. No insights into the number of users on the ad-supported tier either, though the rumor mill has that number at just 1.5 million in the US.

And while revenue did actually grow 2.7% that quarter, that number is a bit below Wall Street’s consensus number, and the gap for their projected Q3 revenue was a bit wider still.

Worse still, as Evan Shapiro points out, while the gap between their projected revenue growth of 3.4% and their actual revenue growth of 2.7% may seem like a rounding error, it’s actually a miss of around 21%.

That’s not nothing, and that, along with all of the above, worked to drive their stock price down 8.5% as of Thursday morning. 

The question is, was it justified?

Why It Matters

Wall Street often struggles to understand streaming. For many years, a rosy subscriber number count was all it took to push numbers upwards and to be fair, Netflix’s stock is still up 48% year to date.

The thing is though, that when companies are unclear about numbers, the assumption is that there is always a reason, which drives prices down.

Sometimes even when they are clear too: when Netflix announced its first-ever subscriber loss, they were pretty upfront that the cause was they’d just pulled out of Russia following their invasion of Ukraine. With those Russian subskis still in place, they’d be ahead.

Yet Wall Street reacted as if the sky had fallen.

On the one hand, it was a realization that they had been too overly exuberant for too long about streaming. 

On the other, it was proof that many did not really get the economics of streaming and based their actions largely on their own viewing habits, a variation on Warren Buffet’s Value Investing philosophy.

To be fair though, Netflix’s end game has never been all that easy to figure out.

There’s a school of thought that says it’s all just a giant Ponzi scheme of sorts, based on the constant acquisition of customers worldwide.

There are those who point to their back-end payment plans for talent and wonder when that is all going to blow up.

On the flip side, Netflix has way more hours watched (“engagement”) than any of its competitors save YouTube, as per a recent MoffettNathanson-HarrisX report. This despite not having any recent hits. Is it because their strategy of having lots of shows that appeal to various niche audiences is working or is it a result of the massive size of their subscriber base vis a vis other services?

And more than that, is it significant that viewership is down for its English-language shows versus 2022? 

These are all valid questions and the answers will play out over the next several years.

I can tell you what I think is going on now, which is that Netflix is still coasting on the fact that it is the most widely known streaming service out there. We (and by “we” I mean anyone who cares about the TV industry enough to be reading this newsletter) often forget that there’s a whole cohort of people who are still largely unaware of streaming services other than Netflix and mostly watch linear TV. 

Or that someone with a six-year old smart TV and no dongle likely only has access to Netflix.

So there’s all that and it does start to add up in Netflix’s favor.

The other thing I think is that Netflix is in the process of adjusting expectations of what it is as it shifts from being the place with all the buzzed about “snobby shows” to being the place with more mainstream and niche programming that doesn’t warrant a whole lot of buzz. 

And that this strategy is in many ways risky because people feel justified paying $15/month for the ability to watch shows like The Queen’s Gambit and Stranger Things, but not necessarily for a bunch of reality shows and B+ sitcoms.

Which might boost the ad-supported arm of Netflix, as people decide all that is only worth $7/month plus commercials, or it might drive people to Peacock, Paramount and AppleTV+.

It’s still too soon to tell, though the fact that Netflix did away with their lowest price ad-free tier would seem to indicate they are trying to push lower-cost subscribers to the ad-supported tier while continuing to push everyone else to a higher-priced tier.

That may be a wise move though, given that Netflix has one huge advantage right now in late July 2023, and that is its massive international presence—Netflix has planted its flag in every country on earth save China, Syria and North Korea.

International content has done very well for Netflix, everything from South Korea’s Squid Game to Israel’s Shtisl to France’s Call My Agent to Germany’s Babylon Berlin.

And there’s a lot more where that came from.

This puts Netflix in pole position to survive the WGA and SAG AFTRA strikes, especially given that the strike is going to hit the broadcast networks harder. A no-new-shows fall will only serve to drive away viewers who have no interest in reality television. Which in turn will surely increase the degree of cord-cutting, thus hastening the pace at which linear pay-TV fades away.

But even among streamers, Netflix seems to have an advantage. 

Not only do they have a treasure trove of library series, Hollywood films and indie films—the latter of which have largely gone unseen— they also have a not-affected-by-any-strikes pipeline of solid original programming from overseas that could give them a serious leg up over their rivals.

Granted getting Americans to watch shows with subtitles is always a hurdle, but AI should make dubbing those shows into English a lot easier.

Something to think about and a clear advantage for Netflix right now.

What You Need To Do About It

If you’re Netflix I have three pieces of advice for you. 

1. Don’t discount the value of big, buzzy, Succession-style hits. I get that the fear is that when these shows get too highbrow they run the risk of turning off those mass market viewers you need to reach, the next wave, if you will. But the perceived value of those shows, even if someone never winds up watching them, serves to justify the high cost of the service.

2.  Start running linear channels to help surface your massive library. You’ve got so much programming. So many movies you’ve bought over the years. So many hit network shows. So much international library content, much of which is in English. Take that and create a linear offering, especially on the ad-supported tier. Give the channels the clever titles you used to give to your recommendations back in the day, you know, “Dark Movies Starring Dark-Haired Women” and the like. Not only will it increase viewing time, but it will increase the perceived value of your service once viewers realize just how many different offerings you’ve got on there. Your movie library in particular.

3.  Keep doubling down on sports. There’s a whole audience out there that pays for the ad-free version of every streaming app and so the only time they see ads is on live sports. Brands will pay big money to reach them. Not only that, but you can use these live sporting events to promote all your new shows, movies and (wait for it) linear channels.

2. Local Broadcasters Push Back On vMVPDS

Retransmission rules in the US are tricky. Thanks to the Cable Act of 1992, MVPDs have to carry every local broadcast station and those local broadcast stations can (and almost always do) charge the MVPDs what are known as retransmission fees for the privilege.

Retrans fees, along with their companion carriage fees for cable networks, are worth billions and are why the streaming business, which has no way to collect them, will never be as profitable as old school linear. 

You can read our take on all that here, but for today, we’re going to focus in on how a coalition of local broadcast stations are looking to regain their ability to collect those fees from vMVPDs, who, at present, pay those fees directly to the networks with whom the local broadcasters are affiliated.

While it may seem petty, there are tens, if not hundreds of millions of dollars at stake here, along with the growing realization that vMVPDs are, in fact, just MVPDs with a different delivery mechanism and not “OTT apps” with a lot of cable channels.

Why It Matters

When vMVPDs were first launched, the industry was not sure what to make of them, with many (incorrectly) calling them “OTT apps” and suggesting we treat them like Netflix.

While signing up national cable networks was easy enough for the vMVPDs, they struggled initially with local broadcasters, especially once they realized they'd have to go out and strike a deal with all 1,000+ local broadcasters individually.

A solution soon presented itself though as the vMVPDs struck deals with the big broadcast networks that covered both O&Os (owned and operated stations) and affiliates.

But now the affiliates want their own deals.

An organization called The Coalition for Local News was recently launched with the intent to help local broadcasters do just that. 

While using “local news” as a hook, the coalition, which seems to have support from  Allen Media Group, Cox, Gray, Nexstar, Scripps, Sinclair and Tegna (among others) is looking to eliminate what it calls “the streaming loophole” in the current FCC rules that requires “cable and satellite providers, but not online streaming services, to negotiate directly with local broadcasters for carriage of their stations.”

They are not wrong.

vMVPDs, as the Coalition's press release points out, now represents about one-third of the pay-TV market and it’s one of the only areas of that market that’s growing.

What’s more, access to local stations, with their news and sports, is one of the main reasons many viewers stay with pay-TV.

So it only seems fair to let the individual stations get their fair share while they still can.

What You Need To Do About It

If you are a Coalition member, set your expectations accordingly. Yes, you are right. But you will need the FCC or Congress to act on your behalf and there is so much about streaming they don’t understand.

Framing the issue as an access to local news issue is a smart move, but just be aware this is going to require a whole lot of effective lobbying to move the needle.

Your best bet is to focus on your next move—what happens when you have more viewers on streaming than linear platforms, and what can you do to monetize the valuable news content you have. (More on that in our upcoming report on Local TV and Streaming.)

If you are a vMVPD, stonewall. You are riding high right now as the nicotine patch of sorts for people who want to give up pay TV, but still have access to their favorite sports and news networks. But look at the RSNs—those networks are launching streaming apps too, and pretty soon your user base will shrink.

So right now, the wisest move is to align yourself with as many smaller MVPDs as possible and provide the TV component to their broadband + TV offering. Demand for that should have a much longer life span.