Navigating Netflix’s ‘Comeback’

With nearly 149 million subscribers globally, including more than 60 million in the United States, Netflix should have little to worry about as subscription streaming video-on-demand pioneer.

Yet, despite market valuation 122 times annual net income — after a 15% ($26 billion) drop in stock capitalization following sluggish Q2 subscriber growth numbers — Netflix is facing some tough decisions navigating a mature U.S. SVOD market and increased localization demands abroad, according to a new report from MIDiA Research.

Netflix net income in the first half of fiscal 2019 (ended June 30) fell nearly 9% to $614.7 million from $674.47 million during the previous-year period. At the same time, revenue costs increased 25.5% to $5.9 billion from $4.7 billion.

While the numbers might not appear alarming for a high-flying company like Netflix, it is important to remember that the service bases much of its spending on subscriber growth.

And Netflix lost 126,000 domestic subs in Q2 — the service’s first quarterly sub loss since 2011’s disastrous price hike debacle when the stock plummeted 75% in value. International sub growth stalled at 2.8 million from a projection of 4.7 million.

“Netflix still has brand equity within the future of video consumption in the U.S.; however, it now needs to strengthen that and provide a compelling engagement argument for the older demographics who are the most prone to the new direct-to-consumer services coming from Disney, Apple, NBC Universal and WarnerMedia,” read the report.

Netflix has begun the process by taking the unusual step of disclosing viewership data for original series, “Stranger Things,” which is reportedly tracking about 10.1 million viewers per episode for the current third season.

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The data is important considering MIDiA contends 59% of U.S. consumers between the ages of 16-19 stream Netflix on a weekly basis. But the report suggests Netflix will soon face unprecedented SVOD competition, including burgeoning Hulu and Amazon Prime Video.

“Content mix and features alone are no longer enough; now shows must have the brand resonance and content strategy to maintain audience demand between series,” read the report.

MIDiA contends Netflix should put increased focus on original content on education-based content such as documentaries, while working partnering with the top research universities.

“This content class would expedite the growth of brand awareness beyond the urban bridgeheads which Netflix has forged in emerging markets thus far,” read the report.

In addition, the report suggests that the inclusion of sponsored content, product placement, dynamic ad insertion and video games could bolster revenue growth going forward.

“From franchised games titles, through to strategic marketing partnerships, games are becoming a crucial part of the marketing and content mix for many shows,” MIDiA wrote.

The report says product placements, cobranded content, and increased leveraging of subscriber segments could trigger complementary revenue streams that offset the stalling net income versus increased costs.

“Games audiences represent a growing opportunity to extend TV show brand reach and engagement, with many games and TV titles having strong fanbase overlap (e.g. ‘Stranger Things’ / Assassins Creed),” MIDiA wrote.

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