All Eyes on Netflix Satellite As It Orbits Fiscal Sun

Netflix Oct. 20 will release fiscal third-quarter (ended Sept. 30) results after the market closes. While a traditional flag bearer among media/tech companies during financials, this 90-day period brings added scrutiny. Netflix has been on a tear. Its stock has catapulted 75% since mid-March when the pandemic started — reaching a near all-time high Oct. 16.

But can the SVOD pioneer sustain its skyrocketing subscriber growth during the pandemic, and, secondarily, can it overcome the media/legal fallout from criminal charges alleging the service streamed “lewd material of children” in the French-language movie Cuties?

To be sure, Netflix has tempered its own fiscal expectations, projecting 2.5 million total sub additions worldwide. That’s less than the market consensus of 3.26 million subs. Wedbush Securities media analyst Michael Pachter said he believes the SVOD giant added just 250,000 domestic subs and 2.3 million internationally in the quarter. Netflix added a record 25.9 million subs in the first six months of the year — more than it did for the entire 2019.

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Analysts expect operating income of $1.29 billion, while Netflix is projecting $1.24 billion. Over the past 2 years, Netflix has topped earnings-per-share estimates 75% of the time, while trumping revenue projections 75% of the time.

While industry scuttlebutt suggests Netflix lost millions of subs in the quarter due to the controversy over Cuties — a fictional movie about an 11-year-old Senegalese girl coming of age in 21st century Paris against the backdrop of a religious mother and peer pressure from a young female dance troupe — Pachter thinks increased content demands from housebound subs drove churn higher.Follow us HERE on Twitter!The analyst contends that with the increased numbers of consumers still largely confined to home entertainment due to COVID-19, the lack of new original content on Netflix will increase service dissatisfaction.“The extraordinary level of consumption of Netflix content multiplied by its large subscriber base suggests to us that some meaningful percentage of subscribers will ‘finish’ Netflix before a large quantity of new content can be produced,” Pachter wrote in a note.The analyst said Netflix is facing a potential loss of 2 million subs per quarter going forward without a significant increase in original content. Indeed, recent data from Nielsen found that among Netflix’s most-popular shows, 50% were network reruns.“The law of large numbers suggests to us that if the rate of subscriber churn grows by ‘only’ 1%, Netflix could face an uptick loss of subscribers per quarter beginning later this year or early next year,” Pachter wrote. “We suspect that this phenomenon has already begun and led to the company’s lackluster guidance for Q3 net additions.”

Analysts: Netflix Eyeing Flat Q3 Sub Growth, Near-Term Price Hike

In the rollercoaster COVID-19 era, few media companies have shined as brightly as Netflix. The SVOD pioneer has defied odds and naysayers, adding more subscribers (26 million) in the first six months of the year than it did in all of 2019. It ended June with 193 million subs worldwide.

As the third quarter closes on Sept. 30, the SVOD pioneer is facing challenges, not the least of which is a probable near-term subscription price hike. Netflix hasn’t raised its domestic fee since May 2019 when the most-popular plan increased $2 to $13 monthly.

“After a change in language regarding pricing on the [Q2] call, we believe a potential hike is probable in the near to midterm,” Alex Giaimo, analyst at Jeffries, wrote in a note. “In Q1, Netflix said that they were ‘not even thinking about price increases,’ while the Q2 language was more open-ended.”

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Jeffries contends price hikes from $1 to $2 monthly in North America and Europe could see Netflix add near $1 billion in fiscal 2021 revenue. A similar price hike in Europe, the Middle East and Africa (EMEA) could add $700 million.

“We have confidence that Netflix can raise prices in international markets, given its deepening content library and outsized consumer value proposition,” Giaimo wrote.

On the domestic front, Netflix is facing blowback from politicians and public action committees regarding a small French movie, Cuties, critics say exploits young girls. The streamer also received a letter from GOP senators questioning its motives behind greenlighting an original series based on a book by a Chinese author accused of being pro-Beijing government and anti-ethnic Uyghur Muslims. Both situations have seen increased calls on social media to cancel Netflix subscriptions.

Wells Fargo analysts contend Netflix will add 2.5 million subs globally in Q3 — down from a previously projected 5 million due to increases in subscriber churn. The culprit: a fivefold churn increase to 4.7% in one-week subscriber defections due to Cuties. The analysts said that could result in a sub loss of 28 million. Netflix is projecting a global sub gain of 2.5 million.

Meanwhile, Michael Pachter, media analyst with Wedbush Securities in Los Angeles, said he would surprised if the Cuties controversy extended beyond the United States. The analyst said that with one-third of households considering themselves religious, it’s possible Netflix saw a spike of 1% to 2% over its normal churn.

“Combine that with the pull-forward of new subscribers from shelter-in-place. and they could deliver disappointing domestic subscriber growth,” Pachter said in an email.

The analyst said he would be “shocked” if Netflix raised prices in the face of new competitors such as Disney+, Peacock, Apple TV+ and HBO Max.

“They had no competition before and now they have [competition] priced lower, Amazon content is getting better, and HBO Max will someday figure out how to get their product on Roku-powered TVs,” Pachter said.

“Yes, I think that they can raise the price and that the brand is super strong, but the cult [Netflix bulls] values them at ridiculous levels because the cult believes in unfettered growth, and any shift in that narrative will disappoint them,” he said. “I still don’t expect a price hike.”

Netflix reports third-quarter results Oct. 20.

Parks: Netflix Still Dominates Subscriber Loyalty — Despite Cancel Culture

When it comes to subscriber churn, when a sub chooses to cancel or not to renew their monthly over-the-top video service membership, Netflix remains the market leader in consumer loyalty. New data from Parks Associates underscores the longevity of Netflix subscriptions — in part due to the service’s 26-year first-mover status.

The research firm, which is hosting a panel discussion on the future of video in December, notes that U.S. consumers continue to access OTT content at all-time high levels, but OTT service churn remains high as well.

Netflix, which stopped reporting quarterly churn levels in 2013, saw April 2020 churn decline to 2.4%, according to Bank of America Securities. That’s a marked improvement from the near 4% monthly churn Netflix endured before it stopped reporting the statistic.

“Viewer loyalties are shifting as subscriptions to traditional pay-TV services decline,” research director Steven Nason said in a statement. “The average Netflix subscriber has had the service for over 50 months, and while Amazon Prime Video and Hulu also have foundational status as must-have services, all other services have much shorter subscription histories.”

Indeed, newer services such as Disney+, Apple TV+, HBO Max, and Peacock, plus an expanding CBS All Access, are all making a strong push to be part of the core OTT service stack for U.S. households — and drive up industry churn levels elsewhere.

Separately, a #CancelNetflix campaign on social media continues in response to French film Cuties, which some observers contend glorifies the sexualization of children. The tumult saw Netflix last month change images from an ad campaign for the movie. In a statement, Netflix said the movie from French-Senegalese filmmaker Maïmouna Doucouré, about a young girl who moves to a housing project in Paris and is raised by a conservative mother, is actually a social statement against the sexualization of young children.

Netflix French film ‘Cuties’

“Cuties is an award-winning film and a powerful story about the pressure young girls face on social media and from society more generally growing up — and we’d encourage anyone who cares about these important issues to watch the movie,” Netflix said.

The Parents Television Council, a non-partisan education organization advocating responsible entertainment, said it stands by its earlier criticism that the TV-MA-rated film sexualizes children.

“By removing the offensive poster and replacing it with a more innocuous one, Netflix might actually have made the situation worse by suggesting that Cuties is nothing more than a cute, coming-of-age movie,” Melissa Henson, program director for the Parents Television Council, said in a statement.

Henson said that while the film tackles an important topic, it’s the way the film goes about showcasing underage sexualization that’s problematic.

“This film could have been a powerful rebuke of popular culture that sexualizes children and robs them of their innocence,” Henson said. “But these young actresses were sexualized in the making of this movie.”

Parks: OTT Service Churn Rate Jumped to 41% During Q1

While consumers have jumped into streaming, they have been more fickle about committing to OTT services during the pandemic.

The churn rate for OTT services increased from 35% in Q1 2019 to 41% in Q1 2020, according to research from Parks Associates.

During the COVID-19 crisis, more than two in five U.S. broadband households have trialed an OTT service, and 8% of households have trialed four or more services, according to the report.

“We are seeing a record number of consumers experiment with new OTT services as a result of the COVID-19 crisis and the shifts in strategy in the industry,” Steve Nason, research director of Parks Associates, said in a statement. “OTT services are offering extended free trials to build up engagement, and 8% of U.S. broadband households report they have subscribed to at least one new OTT service since the COVID-19 crisis began.”

Among these new subscribers, 49% subscribed to Disney+ and 27% subscribed to Apple TV+, according to Parks.

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A key question going forward is whether subscribers will keep these services as fewer households shelter-in-place, according to Parks. A significant challenge, especially for services relying on original programming, is delivering new content since production on many series has halted, according to the report.

“The industry is working on new hybrid content strategies as a result of production halts,” Nason said in a statement. “Major players like AT&T for Warner Brothers and Comcast for Universal Studios are greatly concerned about the delays in content production on the launches of new services, like HBO Max and Peacock. Free trials will bring in new subscribers at the launch, and roughly seven in ten have subscribed to at least one OTT service they have trialed. OTT services need to be creative in building an engaging service, but during this time of heavy video consumption, OTT services have the opportunity like never before to win over new video consumers and retain them as long-term subscribers.”