Netflix shares are on the rise again following a seven-day freefall that saw the SVOD pioneer’s stock plummet nearly 20% (or $26 billion) in value after posting disappointing Q2 subscriber growth numbers.
Shares closed July 24 up 3.5% to $317.94 per share — still a ways off the $362.78 valuation on July 17 when Netflix reported fiscal results.
Indeed, the service posted a loss 126,000 domestic subscribers after projecting growth of 300,000 subs. It was Netflix’s first domestic sub loss since 2011 when co-founder/CEO Reed Hastings announced – in an ill-advised tweet from home – the separation of the company’s legacy by-mail DVD rental business from its subscription streaming business.
Despite quickly cancelling the move following subscriber blowback, Netflix shares nosedived 75% in value.
The latest stock decline reportedly cost co-founder/CEO Reed Hastings, who owns 2.5% of Netflix’s stock, $850 million.
Before the drop, Netflix shares were up 35% year-to-date. The service expects to add 7 million subs in the current third quarter, which ends Sept. 30.
Separately, Netflix launched a mobile-only subscription plan in India for 199 Indian rupees ($2.89) monthly – less than half the service’s basic $7.23 plan. The SVOD service’s standard plan in India costs $9.41 and $11.58 for premium access.
The move comes after Netflix added just 2.7 million subs globally in Q2 – slightly more than half of the 4.8 million subs projected.
After disappointing Q2 subscriber growth numbers, Netflix senior management on the fiscal webcast took the high road deflecting the subscription streaming service’s first domestic quarterly decline (since 2011) while adding only half of projected international subs.
CEO Reed Hastings said it might be easy to “over-interpret” the lack of sub growth but that under similar circumstances three years ago management also could not be confident of any specific reason for the slowdown.
“Then, we were $2 billion in quarterly revenue,” Hasting said. “Now, we’re $5 billion. We’re just executing forward and trying to do the best forecast we can.”
When Netflix launched streaming video 12 years ago, there were three competitors (Hulu, Amazon and YouTube). Now, media giants NBC Universal, Disney, Apple and WarnerMedia are launching high-profile competitors – and taking their Netflix-licensed content with them.
Regardless, Hastings said Netflix remains in excellent position as the No.1 SVOD service in the world with more than 151 million subs.
“If investors believe in Internet television … then our position in that market is very strong,” he said.
Chief content officer Ted Sarandos said the service continues to focus on creating original content developed in local markets with global appeal.
He said recent releases “How to Sell Drugs Online” (Germany), “The Rain” season 2 from Denmark and “Quicksand” from Sweden, have generated upwards of 15 million combined viewers globally.
Netflix is expecting a similar reception to the second season of India’s “Sacred Games,” which launches this quarter.
“What’s been amazing is [that the shows have] been deeply relevant in the home country, traveled the region very well and found global audiences,” Sarandos said.
With WarnerMedia set to launch SVOD competitor “HBO Max” in early 2020, it was interesting to hear Netflix brass sing praise for the venerable premium pay-TV channel. Indeed, Hastings said most Netflix employees subscribe to HBO.
“We love the content they do and that spurs us on to want to be even better,” he said. “So, it’s a great competition that helps grow the industry.”
Sarandos congratulated HBO for re-taking the Primetime Emmy Award nominations title, which Netflix claimed from the network for the first time in 2018 after 17 years.
“They continue to be the gold standard that we chase, and we’re really thrilled for them,” Sarandos said.
Netflix July 17 put to rest speculation it plans to incorporate advertising into programming similar to what Hulu does.
With the SVOD pioneer spending billions annually on content, Wall Street analysts have suggested Netflix would roll out an ad-supported viewer option to generate incremental revenue to help pay for it.
CEO Reed Hastings put a halt to the scuttlebutt.
“We, like HBO, are advertising free,” Hastings wrote in the shareholder letter. “That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”
With Netflix continuing to exponentially outspend ($12 billion in 2018) its over-the-top video rivals on original content and other corporate needs, the SVOD pioneer April 23 disclosed it is seeking an additional $2 billion in long-term debt financing.
The new bonds — Netflix’s first in six months — would be carried out in a two-part deal with an undisclosed interest rate and maturity date.
Netflix ended first quarter (ended March 31) with more than $10.3 billion in long-term debt – up 58.5% from long-term debt of $6.5 billion in the previous-year period.
The SVOD behemoth could theoretically ask co-founder and CEO Reed Hastings for the funds. The 58-year-old Hastings ended the fiscal period with more than 10 million outstanding Netflix shares, worth more than $3.7 billion.
Separately, Hastings saw his total 2018 compensation increase 48% to $36.1 million from $24.4 million in 2017, according to a regulatory filing.
Chief content officer Ted Sarandos saw his compensation increase 32% to $29.6 million from $22.4 million in 2017. The executive ended the period with more than 490,000 Netflix shares worth $184.2 million.
Chief product officer Greg Peters received $12.5 million in compensation – up from $8.6 million in 2017; excluding $89 million in stock holdings.
Former CFO David Wells earned $5.4 million from $4.5 million, excluding $73.5 million in stock.
Finally, chief marketing officer Kelly Bennett, who is leaving the company, earned more than $7.3 million in 2018. He will exit the company with nearly $20 million in Netflix stock.
Much attention has been given to major media companies such as Disney, NBC Universal and WarnerMedia pulling back content licensing to Netflix for their own branded over-the-top video platforms — and what impact that would have on the SVOD juggernaut.
Not much, according to CCO Ted Sarandos, who says the streaming service has anticipated such changing market dynamics for the past seven years.
Speaking on the April 16 fiscal webcast, Sarandos said CEO Reed Hastings and others long ago concluded Netflix’s future required streaming original scripted series, unscripted series, feature films, documentaries, standup comedy and children’s programming.
“And that’s what we set out to do,” he said.
Longtime Netflix bear Michael Pachter, media analyst with Wedbush Securities in Los Angeles, contends about 80% Netflix’s content license deals with WarnerMedia (“Friends”) and NBC Universal (“The Office”) expire in 2020.
Disney’s exclusive feature film agreement ends this year. Netflix’s recently cancelled Marvel Defenders Universe series, which included “Daredevil,” “Jessica Jones,” “The Punisher,” “Luke Cage” and “Iron Fist.”
“Netflix can thrive in the face of new [OTT video] competition only if it has the content to compete,” Pachter wrote in an April 17 note, aptly named, “Netflix: 57 channels (and Nothin’ On).”
Hastings characterizes any comeback strategy aimed at filling in exiting studio content with similar programming as “very minimalist.”
“You look at [global nature series] “Our Planet,” that’s not filling in for anything else, that’s setting a bold new vision of what programming can be,” he said.
Sarandos said Netflix original interactive series “You vs. Wild” has been streamed by about 25 million households in its first 28 days of release. Pending releases include Klaus, Netflix’s first animated feature film from veteran animator Sergio Pablos, and “Green Eggs and Ham,” an Ellen DeGeneres-produced 13-episode animated series.
“It’s pushing storytelling forward, which I think we’re trying,” he said.
The longtime content executive contends most TV programming is largely interchangeable. Netflix’s focus, according to Sarandos, is original programming (such as India’s “Sacred Games,” and “Love Per Square Foot,”) targeting local audiences that can appeal globally as well.
“If you look at our Top 10 most-watched shows on Netflix, they’re all Netflix original brands,” he said, adding that only four TV series among the service’s Top 25 have at least one season available elsewhere.
“It’s hard to imagine a couple of years ago when Fox said, ‘sunset all of their second-window content on Netflix off of the service to focus on their own efforts,’ and we’ve seen how we’ve been doing since 2017, so we’re pretty happy about it,” Sarandos said.
So is Wall Street, which lifted Netflix shares nearly 3% in April 17 pre-market trading.
NEWS ANALYSIS — With Netflix reporting first-quarter fiscal results after the market close today, some pundits suggest the subscription streaming video behemoth has suddenly become vulnerable to a host of challenges — both real and imagined.
Disney is set to launch a branded SVOD service in November with content previously earmarked for Netflix, and WarnerMedia and NBC Universal are pulling back licensed programming (“The Office,” “Friends” and “Grey’s Anatomy”) as well for proprietary services.
As a result, scuttlebutt suggests Netflix is scrambling to fill the void.
“Just throwing tens of billions at developing more original TV series and movies may not be enough on its own to keep the company growing domestically at the rate needed to reach its goal of 90 million US subscribers,” Helen Back with research firm “Kill the Cable Bill” wrote in a post.
Separately, online pundit “The Entertainment Oracle” contends Netflix has a “Game of Thrones” problem that has nothing to do with the fact the ratings hit resides on rival streaming service HBO Now.
The argument being that the high profile fantasy series — currently airing/streaming its last season — continues to fuel old-school water cooler buzz through weekly episodic programming rather than subscribing to Netflix’s “batch” distribution model.
‘They are losing that weekly buzz that has helped ‘Thrones’ rise to new [viewership] levels,” wrote The Oracle.
The pundit suggests that adhering to weekly programming has helped Amazon Prime Video and Hulu secure industry awards, while apparently ignoring Netflix’s binge/Emmy/Golden Globes success with “House of Cards,” “Orange Is the New Black,” “The Square,” “Unbreakable Kimmy Schmidt,” “Grace and Frankie” and “Bloodline,” among others.
“Netflix does have its big hits and its instant-conversation starters, but by remaining so steadfast in its “all-at-once model”, it’s hurting the long-term possibilities for shareholders and that’s expanding out into the marketplace,” wrote The Oracle.
What’s ignored is that HBO Now (with more than 5 million subs) remains tethered to Amazon Channels to drive sub growth while Netflix has grown domestic subs organically to the tune of 5.4 million net additions annually over the past five years.
Netflix is projected to top 90 million domestic subs by 2024.
More importantly, driving that sub growth is original programming, according to Netflix management.
“I’d say the vast majority of the content that’s watched on Netflix are our original content brands,” CCO Ted Sarandos said on the Q4 fiscal webcast.
Sarandos added that ranking episodic programs by individual seasons on Netflix is “dominated primarily by our original content brands.”
In addition, unscripted programing now accounts for more than 50% of viewer hours in the genre on Netflix, according to CEO Reed Hastings.
Impressively, Netflix says domestic subscribers stream about 100 million hours of content each day, or 10% of the 1 billion hours of daily TV consumption nationwide.
Hastings said Netflix has withstood competitive threats in the past and would do as well going forward. The executive also said he would subscribe to Disney+ when it launches.
“What we have to do is not get distracted,” Hastings said on the Q4 call. “We’ve got a path ahead, everyone else in streaming is trying to find one.”
Netflix co-founder/CEO Reed Hastings has steadfastly championed new competitors in the burgeoning subscription streaming video-on-demand ecosystem.
With the arrival of an Apple streaming video service expected to be announced on March 25 — without Netflix, according to Hastings — followed by Disney+ at the end of the year, and over-the-top platforms from WarnerMedia and Comcast in 2020, Netflix is about to get its most-serious streaming competition since launching OTT service in 2007.
Hastings, per usual, is taking it all in stride.
“We will make this a better industry if we have better competitors,” the CEO told attendees March 18 at Netflix’s Los Angeles headquarters. “All we have to do to succeed is to continue to stream great content and not get too distracted.”
Indeed, with the service projected to reach 148 million paid subscribers worldwide by the end of the first quarter (ended March 31), Netflix has effectively become the largest pay-TV service globally.
At the same time as subscribers consume increasing amounts of original and third-party content, Netflix is winning the battle for OTT video eyeballs.
“I think of it as us winning time away — entertainment time — from other activities,” Hasting said in January on the fourth-quarter webcast. “So, instead of doing Xbox and Fortnite or YouTube or HBO or a long list, we want to win and provide a better experience, [with] no advertising, on-demand [and] incredible content.”
The executive said Netflix — unlike branded services such as HBO, Showtime and Starz — offers content across a wide spectrum genres and interests, which Hastings characterized as a well-balanced stock portfolio.
“We compete so broadly with all of these providers that any one provider entering only makes a difference on the margin,” he said in January. “So, that’s why we don’t get so focused on any one competitor. I really think our best way is to win more time by having the best experiences in all the things that we do.”
Chief marketing officer Kelly Bennett is leaving Netflix, the company announced.
He “has decided to step down from the company after seven successful years in the role” and will stay for a transitional period until a new chief marketing officer is named, according to a Netflix release.
Bennett joined Netflix in 2012 and has led the company’s marketing efforts as it grew from 26 million to more than 139 million paid members around the world, according to the release.
“He’s been instrumental in helping to make Netflix a much loved brand — and pioneered the company’s campaigning approach to the launch of its original content,” the release stated.
“Kelly Bennett has been absolutely transformational for us as we expanded our member base in the U.S. and globally, and particularly as we transitioned into being a leader in original series and films,” said Reed Hastings, Netflix CEO, in a statement. “He has been a source of inspiration both inside Netflix and in presenting our brand to the world, and we are thankful for his enormous contributions.”
“The past seven years have been the most rewarding of my professional life, and we are at the top of our game, which is why this was the right moment for me to retire,” said Bennett in a statement. “I am immensely proud of the team we have built and all that has been accomplished during my time here — and I will continue to be Netflix’s greatest fan.”
Taking a cue from the subscription streaming video-on-demand ecosystem, the video game industry has quietly begun offering content to consumers online rather than solely through packaged-media retailers such as GameStop, Best Buy and Target.
Last May game publisher Electronic Arts acquired the cloud gaming technology assets and personnel of a wholly owned subsidiary of GameFly — the online packaged-media rental service that also offers movies and TV shows.
Specifically, EA aims to distribute its games to consumers online without paying license fees to third-party game platforms such as Xbox, PlayStation and Nintendo. At last year’s at annual E3 gaming confab, EA bowed a prototype subscription online gaming platforms EA Access and Origin Access.
“Cloud gaming is an exciting frontier that will help us to give even more players the ability to experience games on any device from anywhere,” Ken Moss, chief technology officer at Electronic Arts, said at the time.
Sony, whose five-year-old subscription gaming service – PlayStation Now – features hundreds of catalog games for $99 annual fee, is reportedly considering direct-to-access for new releases following its purchases of online platforms Gaikai and OnLive.
“The greatest disruption of entertainment is the combination of streaming and subscription,” Andrew Wilson, CEO of Electronic Arts, told Fortune. “More people are engaging, with less friction, through cloud-driven services.”
At the same time, offering consumers online access to hundreds of games for annual or monthly fees (the latter without contract) threatens an established retail market where game publishers often charge and get more than $50 for a single game.
“I do believe that some subscribers might cancel after finishing the newest game they wanted to play, but the vast majority will keep their subscription because of the online multiplayer component of those same games,” said Greg Potter, an analyst with Kagan, a media research group within S&P Global Market Intelligence. “Publishers are okay with this model because hit games often have multiple revenue streams other than the purchase at the point-of-sale.”
Indeed, the gaming industry saw revenue reach record $43.8 billion in 2018, up 18% from 2017. That figure dwarfed the global box and SVOD markets.
The latter has Netflix CEO Reed Hastings worried.
In the SVOD pioneer’s recent shareholder letter, Hastings said Netflix controlled about 10% of domestic TV screen time – a tally he said is under threat more from online gaming than other SVOD competitors.
“We compete with and lose to [online gaming service] Fortnite more than HBO Now,” Hastings wrote. “When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time. Hulu is small compared to YouTube for viewing time. Our focus is not on Disney+, Amazon [Prime Video] or others, but on how we can improve our experience for our members.”
After fits and starts, Netflix has reportedly exceeded 5 million subscribers in France — five years after launching service largely to indifferent consumers, according to publication Les Echos.
The publication cited comments from Netflix co-founder/CEO Reed Hastings, who was in Paris recently to announce the opening of a company office staffed by 20 employees.
The benchmark is impressive considering Netflix reported 3.5 million subs last September. Since then, the SVOD pioneer has pledge to double local content production. It has also attempted to bridge a divide with the French movie industry, notably the Cannes Film Festival regarding theatrical windows.
The publication said French media pay-TV/SVOD platform Canal+ still exceeds Netflix in average monthly revenue per subscriber (€40) compared to €12 for Netflix.
French households now spend 1% – 2% of their TV viewing with Netflix, compared to 10% in the United States. About 1.7 million people in France watch Netflix and other video-on-demand services daily (including 60-70% Netflix) in prime time, according to an NPA Conseil study.
Les Echos said Canal+plans to launch a less expensive SVOD service with localized content to up competition with Netflix. In addition the service has the ability to license American TV shows such as “Billions” and “The Affair,” as Showtime does not distribute internationally.
“Even though it has reached the 5 million subscriber mark in France, Netflix probably still has a real growth reserve,” wrote Les Echos.