Analyst: Netflix to Weather Content Migration — For Now

With Netflix set to release second-quarter (ended June 30) financial results on July 17, Michael Pachter, analyst with Wedbush Securities in Los Angeles and longtime Netflix bear, contends the subscription streaming video pioneer will add 5.3 million subscribers, including 300,000 in the United States.

The tally surprisingly exceeds Wall Street consensus and Netflix’s projection of 5 million new subs, including 4.7 million international subs.

Pachter argues that despite media attention to the departures of popular TV reruns “Friends” and “The Office” from Netflix in two years, the service has more than enough content in the pipeline and willingness to spend big on new programming to weather the storm.

“Friends” and “The Office” account for an estimated 5% of all viewing on Netflix, leaving other content that accounts for 95% of viewing on Netflix in place.

Indeed, Netflix launched 21 new shows in Q2, excluding 13 returning series. That compared to six news series and 17 returning series in the previous-year period.

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At the same time, content from NBC Universal, Fox, Disney and Warner Bros. currently accounts for upwards of 65% of Netflix viewing hours, according to Wedbush.

Pachter expects the migration of third-party content away from Netflix to competing platforms to be relatively slow and is unclear whether the service can successfully replace it with quantity and quality to keep its subscribers loyal.

“We think it is likely that Netflix will pay whatever it takes to attract high quality content and believe its competitors will be slow to gain scale,” Pachter wrote in a note. “Thus, we expect the status quo to be largely maintained until the end of 2021. For now, Netflix provides tremendous value for its subscribers.”

Netflix Reportedly Eyeing Content Budget Restraint

With Netflix’s fiscal second-quarter ended June 30, the SVOD pioneer reportedly is re-evaluating its prolific content spending.

The service, which ended Q1 with $18.9 billion in third-party content obligations, spent more than $12 billion on original content in 2018 — a fiscal largess senior management is now scrutinizing.

CCO Ted Sarandos in June reportedly held a meeting with mid-level managers with a revised mandate that spending on original content should be commensurate with viewership — especially among new subscribers and long-time inactive members, according to The Information, which cited people at the meeting.

Netflix heretofore has eschewed spending restraint in favor of content’s social media buzz and establishing industry legitimacy.

“They are the leading game in town and were probably overspending relative to what they need,” analyst Michael Nathanson with MoffettNathanson told the website. “Now that they are in a strong position, they probably want to allocate more of that spending overseas.”

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The service in recent years has blown up industry norms outspending/bidding over-the-top competitors and traditional pay-TV players for content and exclusive license agreements.

With domestic sub growth maturing and a bevy of pending OTT video services launching from deep-pocket competitors such as Apple, Disney, WarnerMedia and NBC Universal, among others, Netflix now wants original programming to pay for itself — a challenge for a business model that shuns advertising, the theatrical window and transactional VOD.

Sarandos, according to The Information, was at odds with the reported $115 million spent on Triple Frontier, the original action movie with Ben Affleck and Charlie Hunnam (“Sons of Anarchy”) that apparently didn’t resonate with subscribers — or the service’s bottom line.

In fiscal 2018, Netflix generated negative cash flow of $3 billion on revenue of $16 billion — a figure projected to increase to $3.5 billion in fiscal 2019 — much of it due to content spending.

“There’s been no change to our content budgets, nor any big shifts in the sorts of projects we’re investing in, or the way we greenlight them,” said a Netflix spokesperson.

Meanwhile, pending original movie The Irishman, from director Martin Scorsese has a reported budget of $150 million. With Netflix eyeing the mob thriller for next year’s industry awards, the service will have to compromise on its concurrent theatrical/streaming release mandate, says Michael Pachter with Wedbush Securities in Los Angeles.

“We expect Netflix and exhibitors to reach an accommodation where there will be a shortened window in exchange for lower film rent,” Pachter wrote in a July 1 note.

A typical film earns 83% of its box office within four weeks, and 96% within 60 days, which Pachter believes could soften exhibitors’ revenue loss to around 3% as the result of a shortened theatrical window to appease Netflix’s business model.

“We think that if studios or platforms like Netflix are willing to trade film rent for an earlier window, the negative impact on exhibition would be limited particularly for films well-suited for the big screen,” Pachter wrote. “The Irishman may fit the bill.”

Netflix reports Q2 fiscal results July 17.

Video Game Sales Continue May Decline

Sales of video game hardware and titles dropped 11% to $641 million in May compared to sales of $720 million during the previous-year period, according to new data from The NPD Group.

The decline was spearheaded by 20% drop in consoles to $149 million from $186 million, and 13% drop in software sales to $262 million from $301 million last year.

It was the worst May for software sales in six years. Sales of accessories and game cards remained flat at $230 million.

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Analysts contend the slowdown is largely due to consumers waiting for pending new edition – i.e. Microsoft’s Project Scarlett – consoles in 2020.

“Console makers will likely ensure that physical discs exist for at least one more console cycle, which could reverse negative comp trajectory,” Wedbush Securities media analyst Michael Pachter wrote in a recent note.

Indeed, Pachter doesn’t expect the next console cycle to eliminate physical discs altogether. He says consumers still value physical games for their portability, ease of gift giving and the ability to trade them in at retailers such as GameStop and Best Buy.

“Notwithstanding dire pronouncements about the imminent demise of physical media, our covered game publishers still sell over 50% of their console games in physical form,” Pachter wrote.

E3: ‘Palpable’ Concern Regarding Packaged-Media Gaming, Pricing

As trade shows go, Electronic Entertainment Expo (E3) 2019 in Los Angeles featured the usual blizzard of new-release announcements and industry scuttlebutt about the future of gaming consoles on land (hardware) and in the cloud.

Sony’s gaming unit, Sony Interactive Entertainment, skipped the event entirely, leaving much of the floor to rival Microsoft.

And it took full advantage.

“John Wick” franchise front-man Keanu Reeves created the most non-industry buzz early when he made a surprise visit to Microsoft’s pre-show presentation for the April 16, 2020 launch of Cyberpunk 2077 (also available on PlayStation 4 and PC), which features the actor as a rebellious punk rocker in a dystopian California where pretty much anything goes.

Keanu Reeves in ‘Cyberpunk 2077’

During the presentation, an attendee yelled out, “You’re breathtaking!,” to which the actor returned the compliment, adding that everyone in attendance was “breathtaking.”

The comment soon went viral, tracking more than 2.1 million views on Twitter and elsewhere.

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But to industry old-schoolers, a future of online gaming and subscription streaming supplanting $60 discs is breathtaking for the wrong reasons.

While Microsoft disclosed that Xbox One replacement — dubbed Project Scarlett — is still slated for launch for the 2020 winter holidays and would include an optical disc drive, the company remains laser-focused on streaming.

In October, it promises to preview the xCloud platform, which it claims affords Xbox One users the ability to stream games.

With advances in technology and changing consumer habits, global tech companies such as Google, Apple and Amazon are eyeing gaming.

This has rattled some investors, who heretofore marveled at gaming’s ability to stave off digital distribution in favor of high-margin packaged media played in venerable hardware consoles.

Yet, The NPD Group said that by the end of Q3 2018, 86% of gaming content was sold digitally across console, portable, PC, and mobile.

“There is a palpable level of concern that the traditional $60 upfront price for video games [on disc] is looking a bit long-in-the-tooth given changes in how people now choose to consume music and television, with all-you-can-consume subscriptions becoming the dominant forces in those markets,” Wedbush Securities media analyst Michael Pachter wrote in  June 14 note.

The analyst agrees that secular change within gaming is happening and will expose the industry to increasingly wider audiences demanding diversity (i.e. lower costs) in distribution.

Pachter said that while subscriptions to music and TV/movie streaming services “make some sense” given the long-tail of the content and the large quantity of consumption, he contends that a shift from an a-la-carte business model to subscription is unlikely to become popular except with hardcore gamers.

“We think concerns about pricing are overdone,” he wrote. “The average gamer plays three to four games per year on console or PC and another five to six games on mobile, compared to typical consumption of over 1,000 TV shows, at least that many songs, and dozens of films each year.

“We are skeptical that a Netflix-like service will emerge with thousands of choices at a low monthly price and think investor concerns about the erosion of the current business model are unfounded.”

New GameStop CEO Promises Change; Wall Street isn’t Buying: Stock Down 38%

New GameStop CEO George Sherman, in his first earnings call on June 4, pledged to shake up the status quo in an effort to transform the world’s largest video game retailer in the digital age.

Wall Street beat him to the punch after GameStop reported a 75% drop in quarterly income — driven in part by a 35% drop in console sales. Revenue fell 13.3% to $1.54 billion.

Company shares are down a record 38% in midday June 5 trading, with more than six times the typical daily volume of shares traded in just four hours.

GameStop CEO George Sherman

“We struggle with how much GME will able to monetize new ‘experiential’ and subscription initiatives such as eSports and revamping the PowerUp rewards program,” Bank of America Merrill Lynch wrote in a June 5 note.

Sherman said the “GameStop reboot” must “transform” the retailer to remain a viable player in a changing industry underscored by subscription streaming and digital access.

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He said the retailer would focus on the “20% of our SKUs that drive 80% of our business.” Notable among those performing SKUs: Collectables. The segment saw sales increase 10.5% to $157.3 million, with continued growth of trend items in both domestic and international stores.

“We’ll continue to get better at that piece of the business through inventory optimization and expand the assortment of exclusive products that our customers desire,” Sherman said.

At the same time, GameStop is divesting interest in Simply Mac, with a sale of the unit expected in the second quarter and melding the ThinkGeek.com business within the company’s branded “omni-channel” experience.

Sherman is looking to generate a $100 million operation income improvement while cutting debt more than $350 million. He also wants to better leverage the company’s 60 million PowerUp Rewards members.

“We’re evaluating new revenue streams and how we can and should participate in the digital economy, particularly given the significant number of loyal customers we bring the publishers and console makers,” Sherman said. “This will take time but is a necessity to enable us to continue maintaining our position as the leader in the video game space.”

Michael Pachter, media analyst at Wedbush Securities in Los Angeles, says that despite ongoing consumer shifts away from packaged media, majority demand still exists.

“We don’t expect the next console cycle to eliminate physical discs altogether,” Pachter wrote in a note. “Consumers still value physical games for their portability, ease of gift giving and the ability to trade them in for value at GameStop. Notwithstanding dire pronouncements about the imminent demise of physical media, our covered game publishers still sell over 50% of their console games in physical form.”

Netflix Posts Record Quarterly Sub Growth; Lower Q2 Growth Projection

Netflix hit another home run in subscriber growth, adding record 9.6 million net additions in the first quarter, ended March 31 — up more than 16% from 8.26 million net additions in the previous-year period.

Netflix ended the period with 148.86 million paid subs, up 25.2% from 118.9 million subs in the previous-year period.

The subscription streaming video pioneer April 16 said it added 1.74 million domestic subs to 60.2 million, in addition to 7.86 million subs internationally to 88.6 million. The service had forecast subscriber growth of 1.6 million domestic and 7.3 million foreign.

Wedbush Securities media analyst (and Netflix bear) Michael Pachter had projected 1.5 million domestic subs; 7.3 million internationally.

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Netflix posted net income of $344 million on revenue of $4.5 billion. That compared to net income of $290 million and revenue of $3.7 billion during the previous-year period.

Notably, Netflix alluded to its recent price hikes in the U.S., Brazil, Mexico and parts of Europe having some effect in the current quarter. Indeed, the streamer is projecting 5 million new subs in the current second quarter (ending June 30) — about 1 million below Wall Street projections.

“The response in the U.S. so far is as we expected and is tracking similarly to what we saw in Canada following our Q4’18 increase, where our gross additions are unaffected, and we see some modest short-term churn effect as members consent to the price change,” CEO Reed Hastings and CFO Spence Neumann wrote in the shareholder letter.

The executives hailed recent OTT video announcements by Apple and Disney as “world class consumer brands,” adding that Netflix would be  “excited to compete.”

Hastings and Neumann said they don’t expect Apple TV+ and Disney+ to materially affect its growth because the ongoing transition from linear to on-demand video is “so massive” ​and because of the differing nature of Netflix’s content offerings​.

“We believe we’ll all continue to grow as we each invest more in content and improve our service and as consumers continue to migrate away from linear viewing [similar to how U.S. cable networks collectively grew for years as viewing shifted from broadcast networks during the 1980s and 1990s],” Hastings and Neumann wrote.

Netflix’s legacy by-mail disc rental service continues to generate significant  operating income. The oft-neglected (by management) business contributed $46.7 million in operating income on revenue of $80.6 million. That compared to operating income of $56.8 million and revenue of $98.7 million last year.

The service ended the period with more than 2.5 million disc subscribers, down from 3.1 million subs last year.

Netflix said new-release movie, Triple Frontier, ​starring Ben Affleck, has been watched by more than 52 million member households in its first four weeks on Netflix.

Ben Affleck in Netflix original movie, ‘Triple Frontier.’
Woody Harrelson and Kevin Costner in ‘The Highwaymen’.

The streamer said new-release movie, ​The Highwaymen, starring Kevin Costner and Woody Harrelson as two lawmen attempting to bring Bonnie and Clyde to justice, is on track to being watched by more than 40 million subscriber households in its first month.

Separately, Netflix said original documentary, FYRE: The Greatest Party That Never Happened​, has been watched by more than 20 million member households in its first month on Netflix.

Doc Our Planet​, filmed over four years in 50 countries, is tracking to be one of Netflix’s most successful global documentary series, with more than 25 million subscriber households projected to watch in the first month of release.

 

Disney+ Day After: Stock Up, Netflix Down

The morning after Disney’s unveiling of branded subscription streaming video platform, Disney + launching on Nov. 12, Wall Street applauded the move, upping Disney shares nearly 10% to $128 per share in mid-morning trading.

Netflix, which is Disney’s targeted competitor despite myriad denials, is down slightly (2.79%) at $357.37 per share.

Goldman Sachs welcomed the service’s wide content selection, pricing (23% lower than Netflix), global rollout and aggressive subscriber projections.

Credit Suisse cautioned about Disney’s projected losses (approaching $1 billion) in the upstart direct-to-consumer & international business segment, which includes ESPN+ and Hulu. Disney expects Disney+ to be profitable in five years.

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SunTrust, citing an internal survey, found that just 8% of Netflix subs said they expected to switch to Disney+, with 59% sticking with Netflix. Another 24% said they would subscribe to both.

“Bottom-line, Disney+ features family content, while Netflix offers a much broader range of content with the majority of the most-searched content on the platform,” SunTrust analysts wrote in an April 12 note as reported by CNBC. “As such, we do not view Disney+ as a strong alternative to Netflix.”

Rich Greenfield, media analyst at BTIG Research in New York and former Netflix earnings webcast moderator, wondered if original Disney+ series will be available to binge view or just on a weekly basis similar to HBO and Showtime.

“No clarity on release schedule for show yet,” Greenfield tweeted. “Sounds like no binging.”

Notably, while the last original new-release Disney movies coming to Netflix this year include Solo: A Star Wars Story, Incredibles 2, Ant-Man and the Wasp, Christopher Robin, May Poppins Returns, Ralph Breaks the Internet, and The Nutcracker and the Four Realms, among others, little attention has been made that catalog Disney movies will reportedly still be heading to Netflix on a per-title basis.

The “pay 2” window essentially follows the free cable window when movies are released on networks such as USA Network and FX, among others.

“Wonder if Disney will explain how Disney+ will lose access to certain Pixar, Marvel, Disney and Star Wars films as they enter the “pay 2” window and revert to Netflix,” Greenfield tweeted.

Separately, Michael Pachter, media analyst with Wedbush Securities in Los Angeles, suggested Netflix sub growth could be negatively affected in Q2 following the service’s recent price hikes.

“Although domestic Q1 [ended March 31] subscriber additions will likely be in line with guidance, the price increases in April – June may limit growth (and guidance) to below 1 million net additions, which may weigh on the stock,” Pachter wrote in an April 11 note.

Netflix releases Q1 fiscal results on April 16.

 

 

 

 

Can Netflix Ever Win a Best Picture Oscar?

NEWS ANALYSIS — Netflix original movie Roma won three Oscars, including Best Foreign-Language Film, Best Director and Best Cinematography. But the black-and-white Mexican drama with 10 Oscar nominations had been a heavy favorite for Best Picture, which instead went to Green Book.

Did Netflix’s controversial strategy offering original movies on its service globally concurrent with any theatrical release turn off traditional voters?

Netflix reportedly spent $30 million marketing the $15 million movie during the just-concluded industry awards season. The goal clearly was a Best Picture Oscar.

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The SVOD pioneer, which has an office in Beverly Hills, in addition to a production studio, had canvassed Greater L.A. with billboards and related signage where most of the 7,000 members of The Academy of Motion Picture Arts and Sciences reside.

While Roma’s qualifications for Best Picture aren’t in question (the film was nominated for the category, after all), industry politics undoubtedly played a role in the final outcome — as they do for any nominee.

Director Steven Spielberg, speaking at Cinema Audio Society prior to the Oscars, lamented rewarding a film with scant theatrical release.

“I hope all of us really continue to believe that the greatest contributions we can make as filmmakers is to give audiences the motion picture theatrical experience. I’m a firm believer that movie theatres need to be around forever,” Spielberg said, as reported by The Telegraph.

Indeed, Netflix made sure to highlight the film’s theatrical release in its recent shareholder letter.

Roma is still being exhibited in theaters and has played on over 900 unique screens around the world, including some special 70mm format presentations,” CEO Reed Hastings wrote. “People love films … at home ​and in theaters.”

Michael Pachter, media analyst at Wedbush Securities in Los Angeles, downplayed politics, saying Roma’s best foreign language film win underscored the Academy’s reluctance awarding Best Picture status upon a non-English film.

“I suppose [2011 Best Picture] The Artist was technically a foreign film,” he said. “They just need a movie that is worthy of the award. Netflix will pay up for something like the next CrashArgo or 12 Years a Slave and will win one eventually.”

NATO: Streaming Video Not Stealing Moviegoers

Theatrical owners, especially trade group National Association of Theatre Owners, have long criticized efforts by over-the-top video services (i.e. Netflix) to shorten the theatrical window.

Their argument underscored the contention that streaming video competes against theatrical distribution and negatively impacts consumers frequenting movie theaters.

So, it was a little unusual when NATO released data from a proprietary survey conducted by consultant Ernest & Young suggesting video streamers are more likely to be avid moviegoers than non-streamers.

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Citing a survey of 2,500 respondents, 80% of whom said they saw at least one theatrical movie and streamed video in the last 12 months, average streaming hours per week was higher among frequent moviegoers than respondents who visited a theater only once or twice.

Respondents who visited a theater infrequently reported an average of seven hours of streaming video per week versus 11 hours of streaming per week for those who visited a theater frequently.

The study found that nearly half (49%) of respondents who didn’t frequent a theater in the past 12 months, didn’t stream video content at all. Another 18% streamed online content for eight or more hours per week.

“The results of this study dispel the common myth that millennials are going to the theater less as they stream more content,” Wedbush Securities media analyst Michael Pachter wrote in a Feb. 11 note. “Actually, quite the opposite appears to be true. There is a positive relationship between theater attendance and streaming volume.”

Analyst: Major Studios Could Squeeze Netflix on Original Programming

As Netflix continues its global domination in subscription streaming video, the market leader is facing a looming threat to its vaunted original content pipeline from major studios such as NBC Universal, Warner Bros., Disney and Fox.

With WarnerMedia and Disney launching branded over-the-top video platforms later this year, and Comcast rolling out ad-supported VOD service to its subscribers in 2020, the studios at the same time remain creators of original content for Netflix.

Specifically, the four studios provide about 20% of Netflix’s overall content measured by available hours and nearly 40% of hours viewed on the service, according to Wedbush Securities digital media analyst Michael Pachter.

The analyst, citing a study published by Recode, said that 13 of the 20 most-viewed programs on Netflix were provided by the aforementioned studios, including the top six.

“By the end of 2020, we expect all of this programming to disappear from Netflix, and we think that the company will find replacing the content with originals a daunting task,” Pachter wrote in a Jan. 28 note.

The analyst said Netflix faces replacing existing content from the studios and competing against Amazon Prime Video, Hulu and potentially four competing new streaming services for original fare.

“The balancing act Netflix faces is potentially enormous,” wrote Pachter, a long-time Netflix bear.

He said Netflix continues to juggle licensed originals such as “Ozark” and “House of Cards,” which are owned by Media Rights Capital, and Lionsgate-produced “Orange is the New Black,” with proprietary original fare “Stranger Things,” among others.

Licensed content is subjected to recurring fees. The streaming service can offset the loss of Disney, Fox, Warner and NBC Universal content by licensing equal amounts of content from other sources or by creating its own – a strategy Netflix is pursuing with the hires of former ABC Entertainment President Channing Dungey; Ryan Murphy, producer of “American Horror Story,” Shonda Rhimes, creator of “Grey’s Anatomy” and “Scandal,” and Kenya Barris, creator of “Black-ish.”

Pachter contends the original content will be the subject of a bidding war with Prime Video, Hulu, HBO Now, WarnerMedia and Disney+, among others.

“We think that with lower access to high quality content, Netflix may actually end up spending less than it has historically, although the company must replace existing third party content with its own and may redouble its owned original efforts,” wrote the analyst.