The Day Netflix’s Fiscal Call Became Irrelevant — to Netflix

Michael Morris, an analyst with Guggenheim Securities, was in a no-win position. As the Wall Street expert on tap April 21 to question Netflix executives on strong quarterly results (more than double projected sub growth) favorably impacted by the coronavirus, Morris was met with what appeared to be a collective air of guilt and concern. It was not a time to gloat or high-five success.

Indeed, Netflix added nearly 16 million subscribers worldwide in the first three months of the year — about 7 million more than revised Wall Street estimates and 9 million more than what Netflix had expected.

At a time when many media companies are scrambling to find funds, and some movie theaters are facing bankruptcy, Netflix has seen its stock reach record highs — briefly valuing the company higher than The Walt Disney Co.

CEO Reed Hastings, CFO Spenser Neumann, CCO Ted Sarandos, chief product officer Greg Peters, and Spencer Wang, VP, finance & investor relations, seemed to be in no mood to discuss the robust quarter, pricing, sub growth or balance sheet at a time when an ongoing pandemic devastates many of its markets globally.

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“It’s an incredible tragedy for the world,” Hastings said about COVID-19. “Everyone is wrestling with the implications, both on health, on hunger, poverty. And we, too, are really unsure of what the future brings.”

“It’s been humbling to be a place that people around the world in a time like this turn to for some entertainment for escape,” Peters said.

Neumann said Netflix was fortunate to be running smoothly during industry-wide shutdowns and quarantined employees, while doing the “best we can” to keep employees and production crews safe, healthy and taken care of.

“That’s been our primary focus,” he said.

Hastings said he and the rest of the company remained as uncertain about the business future in a COVID-19 universe, adding that distributing entertainment through the Internet wasn’t slowing.

“People want entertainment,” he said. “They want to be able to escape and connect, whether times are difficult or joyous. Will Internet entertainment be more and more important over the next five years? Nothing has changed in that.”

When Morris attempted to ask a question about subscription pricing and how it might be implemented in a non-virus environment, Peters wasn’t biting.

“At this point, we’re not even thinking about price increases,” he said. “What’s going on around the world is dominating our thoughts and our considerations. So, we’re really just focused on that for this period.”

When Morris flipped from asking about a price hike to a price cut with so many people out of work or furloughed, Peters deferred to Neumann, who reiterated that it “really [wasn’t the] time for us to be thinking about price changes. We haven’t lived through anything like this. So it’s so hard to tell.”

Sarandos said Netflix was deep into production for its 2021 original content slate, underscoring the fact the service has no content shortages while production is shutdown.

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Indeed, Netflix’s original true crime documentary “Tiger King” has proven to be major hit, tracking 65 million subscriber households since its March 20 launch.

“We don’t anticipate moving the schedule around much and certainly not in 2020,” Sarandos said. When asked whether Netflix would incorporate “episode spacing” rather than making all episodes of an original series available at launch, Sarandos said release strategies are being tweaked all the time.

He said the “Love is Blind” dating show featured staggered episodes while the competition series “Too Hot to Handle” was released all at once.

“Customers have spoken loud and clear that they really like the option of the all-at-once model,” Sarandos said. “So, I don’t see us moving away from that meaningfully.”

The executive lauded Netflix’s partnership with Disney-owned ESPN on the just-launched Chicago Bulls/Michael Jordan NBA basketball documentary The Last Dance, which the two companies have worked together on for several years. Netflix and ESPN streamed and aired the first two of 10 episodes beginning April 19.

“It’s been a win-win for us and ESPN, and a great win for basketball fans who’ve been very hungry for new programming,” Sarandos said.

Hastings said Netflix has resumed production in Iceland and South Korea, using those situations to learn how best to implement production in other parts of the world as shelter-in-place restrictions are lifted.

“We’re taking some of those key learnings about how we run those productions today and applying that to our plans to re-start our productions around the world,” Hastings said.

Netflix Reducing Streaming Bit Rates 25% Across Europe

As one of the largest distributors of digital data across high-speed networks, Netflix has agreed to reduce its streaming bit rates in Europe over the next 30 days as the region grapples with the coronavirus pandemic that has now exceeded China in the number  of infections and deaths.

The move comes after CEO Reed Hastings met with European Commissioner Thierry Breton about Netflix reducing its strain on European networks.

“Following the discussions between Commissioner Thierry Breton and Reed Hastings — and given the extraordinary challenges raised by the coronavirus — Netflix has decided to begin reducing bit rates across all our streams in Europe for 30 days,” Netflix said in an email. “We estimate that this will reduce Netflix traffic on European networks by around 25% while also ensuring a good quality service for our members.”

With mandatory at-home quarantine in some countries, people have turned to the Internet for work and school. At the same time, Netflix has more than 106 million subscribers outside the United States. Its standard definition videos reportedly consume about 1GB of data per hour, while HD videos eat up 3GB of data per hour. Video consumption accounts for about 70% of bandwidth used across European networks.

Akamai reports its networks are experiencing 50% more Web traffic than previously used during this time period. CEO Tom Leighton told Business Insider the company’s peak traffic load in Q1 is twice what it was during the same period last year.

“I think we’ll see more acceleration due to the fact that you have so many more people working from home and you have, kids out of school and spending more time at home,” Leighton said.

 

Netflix’s Reed Hastings Meeting With European Union to Discuss Bandwidth Issues During Virus Pandemic

With much of Europe under quarantine due to widespread outbreaks of the coronavirus, the European Union is calling on streaming video services such as Netflix and Amazon Prime Video to curtail offering content in high definition.

The EU encompasses more than 450 million people, many of whom are home-bound as local governments and health officials battle to contain further spread of COVID-19, which has seen Europe surpass China in the number of infections and deaths.

With people turning to over-the-top video, demands on local ISPs and networks could exceed capacity, according to European Commissioner Thierry Breton, who tweeted “#SwitchtoStandard definition when HD is not necessary.”

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Breton reportedly met Netflix CEO Reed Hastings on March 18 about the issue and is scheduled to do the same today. Netflix, in a statement to CNN Business, said the service already limits streaming to network capacities, including housing content closer to subs in each country.

“Commissioner Breton is right to highlight the importance of ensuring that the internet continues to run smoothly during this critical time,” a Netflix spokesperson said. “We’ve been focused on network efficiency for many years, including providing our open connect service for free to telecommunications companies.”

By 2024, about 63 million Europeans are projected to have a Netflix subscription — up from 40 million in 2018. Netflix had 106 million international subs at the end of 2019, in addition to 61 million in the United States.

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Netflix Opening Italian Office in Rome

Netflix continues its European charm offensive, reportedly setting up Italian operations (with 30 employees) in Rome — a week after doing the same in Paris. Both regional headquarters include increased investment in local content production, in addition to paying taxes.

“Since the launch of the service in Italy in 2015 we have been welcomed with enthusiasm by many Italian subscribers and have had the good fortune of working with a wide range of talents, some well-established while others emerging,” Kelly Luegenbiehl, VP of international originals, told Variety in a statement.

Netflix co-founder/CEO Reed Hastings last October suggested the streaming pioneer would be expanding regional operations from its main European headquarters in Amsterdam.

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The office relocations also amount to an effort by Netflix to curry favor with local politicians who have accused the service of not paying taxes. With the establishment of localized workforces, Netflix will now be paying all appropriate taxes.

Prosecutors in Milan last October said Netflix should pay local taxes despite the fact the service had no physical presence streaming content to 1.4 million Italian subscribers in the country.

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Netflix Italian originals include “Suburra: The Series” and “Baby,” pending witchcraft series “Luna Nera,” all helmed by female directors.

Netflix CFO: Disney+ Not More Popular Outside the U.S.

With Netflix citing increased fourth-quarter (ended Dec. 31, 2019) domestic churn among existing subscribers as a response to new SVOD service launches from Disney and Apple, concern is growing about the impact of Disney’s accelerated SVOD launch plans in Europe in March.

Indeed, Netflix added 420,000 subscribers in the U.S. in the quarter, which was down from 600,000 projected. Outside the U.S., Netflix said it has seen a more “muted impact” from competitive launches in Canada, Australia and Holland.

“As always, we are working hard to improve our service to combat these factors and push net adds higher over time,” executive wrote in the shareholder letter.

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Speaking Jan. 21 on the pre-recorded fiscal interview, CFO Spencer Neumann said that while Disney remains a global brand, its streaming service remains largely focused on catalog programming with a few original shows other than the “Star Wars” spinoff “The Mandalorian.”

“[Disney is] not more popular than they are in the U.S. anywhere else in the world,” Neumann said.

CEO Reed Hastings contends the rise of rival SVOD services is having more of an impact on pay-TV than Netflix in particular.

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“Remember that we compete a lot for time with YouTube,” Hastings said. “And it’s not dollars because that’s ad supported. But we compete very broadly for viewing and as [previously] mentioned our viewing on a per-member basis is up. And that’s because our content is getting better. Our service is getting better. And that’s all coming out of linear TV.”

Streaming, Consolidation Dominate Top 10 Home Entertainment Stories of 2019

Streaming and consolidation dominated the home entertainment headlines in 2019, with the Walt Disney Co. leading the way. Netflix got some subscription streaming competition, and free streaming through advertising, or AVOD, emerged as a new star. It was also a year that saw the home entertainment industry lose a venerable studio player that had helped birth the business more than 40 years prior — 20th Century Fox Home Entertainment. Meanwhile, physical disc sales and rentals continued a structural decline, while electronic sellthrough, the digital sale of content, was a solid performer in the transactional business.

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Here are the top 10 home entertainment stories of 2019, as chosen by Media Play News staff:

  1. Disney Acquires Fox: Disney closed its $71.3 billion purchase of 20th Century Fox Film Corp. The deal included myriad Fox properties, including Fox’s interest in Hulu and 20th Century Fox Home Entertainment, which helped birth the home video industry in 1979. The merger also saw the departure of several executives, including Mike Dunn and James Finn at Fox and Janice Marinelli, president of global content sales & distribution for Disney’s direct-to-consumer & international unit.
  2. Disney + Bows: Calling it the company’s most-important consumer product ever, Disney CEO Bob Iger announced the launch of Disney+, a standalone SVOD service aimed at taking on segment pioneer Netflix and Amazon Prime Video. The service launched Nov. 12 at $6.99 a month offering a trove of catalog movies, including its venerable animated classics and Marvel hits, and catalog TV shows, in addition to original “Star Wars” series “The Mandalorian,” an instant fan hit from director Jon Favreau. Disney also unveiled the bundle offer of ESPN+, Hulu (now controlled by Disney) and Disney+ at $12.99 a month.
  3. AVOD in the Spotlight: Advertising-supported video-on-demand, or AVOD, emerged from the SVOD shadows, gaining traction among subscription-weary consumers looking for free content. Mega-media companies Comcast, Viacom (through the acquisition of Pluto TV) and Amazon (through IMDb) acknowledged the growing market. Reports surfaced that Comcast is eyeing acquiring AVOD player Xumo TV to go along with 2020’s Peacock streaming service debut.
  4. Apple TV+ Launches: Apple Nov. 1 launched a standalone branded subscription streaming service at $4.99 a month, Apple TV+, in more than 100 countries and regions through the Apple TV app. Original content included Golden Globe-nominated “The Morning Show,” “See,” “For All Mankind” and “Dickinson.”
  5. Electronic Sellthrough Continues to Grow: Outside of subscription streaming video, the only home entertainment category to post an increase in consumer spending during much of 2019 was electronic sellthrough, the digital purchase of movies and other content. The segment generated an estimated $1.9 billion in consumer spending through the third quarter of 2019, up 6.7% from the previous-year period, according to DEG: The Digital Entertainment Group.
  6. Redbox Gets Into Content, Out of Disney Movie Code Sales: Redbox launched Redbox Entertainment, a new label to acquire and produce content exclusive for Redbox’s 50 million kiosk consumers. The company tapped Broad Green Pictures and Lionsgate veteran Marc Danon to head content acquisition. The kiosk vendor also settled 2-year-old litigation with Disney, agreeing not to sell the studio’s digital movie codes.
  7. Filmmakers Tweak UHD: The UHD Alliance, along with leaders in consumer electronics, Hollywood studios and members of the filmmaking community, announced collaboration on a new viewing mode for watching movies and episodic TV called “Filmmaker Mode,” designed to reproduce the content in the way the creator intended.
  8. Netflix Takes a U.S. Sub Hit: Disaster struck Wall Street favorite Netflix after the streaming behemoth posted a 126,000 domestic subscriber loss in Q2 after projecting growth of 300,000 subs. It was Netflix’s first domestic sub loss since 2011 when co-founder/CEO Reed Hastings announced the short-lived separation of the company’s DVD rental business from its subscription streaming business. Regardless, stock plummet nearly 20% (or $26 billion) in value after the disappointing numbers.
  9. Changes Afoot at Vudu: Vudu — rumored to be up for sale by owner Walmart, which executives told The Information considers it a non-core business — quietly downsized support for its Vudu To Go/In-Home Disc to Digital app, effective Jan. 1, 2020. The digital movie transactional service will still allow users to convert DVD and Blu-ray movies for digital access by scanning UPC codes on the Vudu app via select portable devices such as a mobile phone and tablet.
  10. Netflix Hails Discs: Taking its eye off its dominant streaming business for a moment, Netflix acknowledged a milestone: Delivery of 5 billion discs since the launch of its legacy disc-by-mail rental service more than two decades ago. The disc rental: Paramount’s Rocketman.

Despite Indifference, Netflix Reigns Supreme in By-Mail Disc Rental

Netflix has all the luck.

The erstwhile by-mail disc rental pioneer’s brand name ushered in the ability for consumers to rent DVD or Blu-ray Disc movies online and receive the disc by mail 24 hours later.

Disc rental has been an unrelenting cash cow for Netflix, generating operating income and crazy margins most companies would call out in an earnings report.

Not Netflix.

The unit reported a $44 million profit on revenue of $71.8 million in the most-recent fiscal period. That revenue represented 98.9% of all by-mail disc rental revenue in Q3 in the United States, according to DEG: The Digital Entertainment Group.

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Instead, Netflix has largely turned a cold shoulder to packaged media for about as long as it has been streaming video — 10 years. In fact, co-founder/CEO Reed Hastings in 2011 infamously tried to spin-off the disc business into the short-lived Qwikster brand — a move that sent Netflix shares freefalling 75%.

Hastings was forced to retract the decision — initially announced in a Sunday blog post from his home — as a corporate misstep.

“It is clear that for many of our members two Web sites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs,” Hastings wrote at the time.

To be sure, the number of Netflix subscribers renting movies and TV shows by mail is dwindling. Subscribers are down nearly 18% to 2.3 million from 2.8 million last year. Revenue through nine months of the fiscal year is off about 15% from the previous-year period at $136.6 million.

One day, by-mail disc rentals from Netflix will be history, quietly removed from “consolidated statements of cash flows” on the balance sheet without so much as a thought. That day might be marked by some in the media as transformational, the end of an era, or just ignored.

Indeed, when Netflix shipped out its 5 billionth disc rental in August, it tweeted the milestone — from a separate corporate account.

Hastings: Netflix Sub Numbers Not as Important as Time Spent Streaming

It’s no secret Netflix subscriber growth is slowing as the SVOD pioneer reaches market saturation. The service is projected to reach 165 million subs worldwide at the end of the current fiscal quarter, ending Dec. 31.

That reality at a time when high-profile competitors such as Apple, Disney, WarnerMedia and NBC Universal enter the streaming video wars underscores why Netflix co-founder/CEO Reed Hastings is hoping Wall Street and others will shift their focus from sub growth to viewing hours.

Speaking Dec. 6 at The New York Times DealBook confab in New York, Hastings said time spent streaming content should become the new metric underscoring a service’s success.

“You’ll hear some subscriber numbers but you can just bundle things so that’s not going to be that relevant,” Hastings said. “So the real measurement will be time — how do consumers vote with their evenings? What mix of all the services do they end up watching?”

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Earlier this year Streaming Observer concluded Netflix subs worldwide spent 164.8 million combined hours a day watching content — and in the process used nearly 500 million GB of data on a daily basis.

Indeed, Hastings’ comment may ring true as nascent competitors such as Apple TV+, Disney+ and HBO Max offer free service to in-house and third-party platforms such as Verizon and AT&T. Apple is offering its service free for one year with any Apple hardware purchase.

Netflix itself has a promotional free year of service with select T-Mobile service plans.

Hastings contends most consumers will subscribe to multiple services, reiterating that he will personally subscribe to Disney+ (“They have great shows!” he said) upon its Nov. 12 launch.

At the end of the day, Hastings is betting consumers will lean toward established brands with proven track records in the SVOD space.

“When you think, ‘Do I turn on cable, do I turn on YouTube, do I turn on Netflix?’ we want you to choose Netflix,” he said.

Reed Hastings Defends Netflix Censoring Content in Saudi Arabia

Netflix is the biggest subscription streaming video service in the world with more than 158 million subscribers, including about 1 million in Saudi Arabia.

Speaking Nov. 6 at The New York Times DealBook confab in New York, co-founder/CEO Reed Hastings was asked about the streamer’s decision earlier this year to delete an episode of “Patriot Act,” the comedy starring Hasan Minhaj, within Saudi Arabia. In the episode, Minhaj (formerly with “The Daily Show”) criticizes Saudi leader Mohammed Bin Salman, characterizing the crown prince as an impediment toward social progress in the Muslim country.

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“There are people in Saudi Arabia fighting for true reform, but [Bin Salman] is not one of them,” Minhaj says in the episode, which is still available in other countries.

Saudi officials contacted Netflix requesting the episode be cut, which the service agreed to do, citing a “valid legal request” from the government.

“We strongly support artistic freedom worldwide and removed this episode only in Saudi Arabia … to comply with local law,” Netflix said in a media statement earlier this year.

Hastings defended the decision, arguing Netflix remains in the entertainment business.

“Well, we’re not in the news business. We’re not trying to do ‘truth to power,'” Hastings told attendees. “We’re trying to entertain. And we can pick fights with governments about newsy topics, or we can say, because the Saudi government lets us have us shows like ‘Sex Education,’ that show a very liberal lifestyle, and show very provocative and important topics.”

Separately, Hastings, as expected, said Netflix would spend $15 billion on original content in 2019, with plans to significantly increase spending going forward.

“We plan on taking spend up quite a bit,” Hastings said. “We’re growing and investing around the world. We’ve been strong in series. Now we’re getting really strong in movies.”

Netflix plans to increase spending on animation and unscripted content in 2020.

“We’re investing heavily there,” Hastings said. “We’ll continue to push the envelope.”

Netflix Brass Doubles Down on Indifference to Pending SVOD Competition

With Disney and Apple just weeks away from launching branded subscription streaming video services, Netflix remains defiant to the pending competition, which includes service launches from WarnerMedia (HBO Max) and NBCUniversal (Peacock) early next year.

Speaking on the company’s Oct. 16 fiscal earnings webcast, CCO Ted Sarandos walked back any apparent corporate weakness regarding comments CEO Reed Hastings made in the United Kingdom last month about a whole new world in over-the-top video awaiting come November.

“I think I got the subtlety of the brave — the whole new world Aladdin reference,” Sarandos quipped. “Everyone else took it pretty literal.”

Many on Wall Street had taken Hastings’ comment to suggest Netflix was concerned, especially after HBO Max and Peacock took away Netflix streaming rights to popular reruns of “Seinfeld” and “The Office,” respectively.

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“From when we began in [2007] streaming, Hulu and YouTube and Amazon Prime Video were all in the market,” Hastings said. “All four of us have been competing heavily, including with linear TV, for the last 12 years. So fundamentally, there’s not a big change here.”

Hastings said he found it “interesting” to see both Apple and Disney launching services in the same week after 12 years of not showing much interest in SVOD.

“I was being a little playful with a whole new world in the sense of the drama of it coming,” Hastings added. “But fundamentally, it’s more of the same, and Disney is going to be a great competitor. Apple is just beginning, but they’ll probably have some great shows, too.”

Indeed, until just recently, Disney exclusively licensed original movies and rights to create original Marvel TV series to Netflix.

The Netflix co-founder reiterated that the SVOD market remains more in competition with linear TV than within its market. He said OTT video is still a relatively small player compared to broadcast TV.

“So, just like in the [shareholder] letter … [writing about] multiple cable networks over the last 30 years not really competing with each other fundamentally but competing with broadcast TV, I think it’s the same kind of dynamic here [with streaming video],” Hastings said.