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.”

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.

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.

 

 

 

 

Analysts Split on Apple’s Streaming Impact on Netflix

The day after Apple’s media coup announcing plans for an enhanced Apple TV app and related services, Wall Street appears divided depending upon which side of the Netflix stock it sits.

With more than 1.4 billion iOS connections globally, the revamped Apple TV+ service would appear to be a major competitive threat to Netflix’s global base of nearly 150 million subscribers and future growth.

With a history of industry disruption and creating consumer markets through iTunes, the iPhone, iPad and Apple Watch, conventional wisdom suggests Cupertino, Calif.-based Apple could upend Netflix’s burgeoning growth and market dominance — despite its relatively late entry into the over-the-top video ecosystem.

Needham analyst Laura Martin contends Apple TV+ could be “poison” to Netflix by virtue of Apple’s 900 million existing connected consumers and its ability going forward to bundle original content, discounted third-party OTT services, music and video games.

In a note, Martin writes that if Apple is successful converting just 10% of its unique users to Apple TV+, it would be able to fund content with a budget nearly triple Netflix’s. The analyst is also bullish on Disney’s pending Disney+ streaming service, telling media it could generate 50 million subs.

Dan Ives, media analyst with Wedbush Securities, says Apple is separating itself from Netflix by catering to family-friendly content on a secure platform.

“[Apple] is trying to differentiate itself [from] competitors and flex its Apple brand muscles to get more consumers on this ‘trustworthy’ platform,” Ives wrote. “We continue to believe the company has the opportunity of capturing 100 million consumers on this streaming service over the next three-to-five years.”

On the flipside, Raymond James analyst Justin Patterson says Netflix market position is well-built to withstand the threat.

“Similar offerings already exist, suggesting this service is more incremental than revolutionary,” Patterson wrote in a note. “We believe Apple’s and Disney’s launches will not adversely affect Netflix’s competitive position.”

Longtime Netflix bear Michael Pachter, with Wedbush Securities, says that with Apple reportedly spending $2 billion on original content, including licensing content from Netflix’ studio contributors – in addition to offering third-party OTT services — the SVOD pioneer will have increased challenges finding compelling content to justify its standalone service.

“We expect Netflix to suffer the double whammy of seeing existing content migrate to competitive services at the same time that new domestic subscribers are more difficult to attract,” Pachter wrote in a March 26 note.

 

 

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.

 

Analyst: Netflix Price Hike to Negatively Affect Sub Growth

Following Netflix’s announcement that it was raising subscription prices, the company’s stock increased in value as Wall Street applauded the service’s first price hike since 2017.

Wedbush Securities’ digital media analyst Michael Pachter has a different perspective. The long-time Netflix bear contends the price hike will negatively impact the SVOD pioneer’s mature domestic subscriber base of around 60 million.

Pachter argues that Netflix has saturated households above the medium income. Any new subs will come from households below the medium income – and likely more price sensitive.

“The latest price increase may slow domestic subscriber growth dramatically this year,” Pachter wrote in a Jan. 16 note. “We do not expect significant churn given the utility provided by the service to existing subscribers but attracting new subscribers will likely be more challenging because of the higher prices.”

The analyst says the price hike will have the biggest impact on Netflix’s $12.99 standard plan affording subscribers to two HD video streams. By comparison, Amazon Prime Video costs $10 monthly when paid annually; and Hulu costs $11.99 for ad-free service.

Regardless, Wedbush contends the additional monthly revenue will never see the bottom line.

“We do not expect a meaningful impact on profitability from the pricing increases, with the extra cash likely used to fund Netflix’s ballooning content budget,” wrote Pachter.

Netflix reports Q4 results at the close of the market on Jan. 17.

 

 

Analyst: ‘Bird Box’ Viewership Suggests Strong Q4 Netflix Sub Growth

Netflix’s fiscal fortunes on Wall Street largely revolve around meeting or exceeding subscriber growth projections. The more subs added, the less attention investors put on the streaming video pioneer’s ballooning content spend.

Netflix is estimating it added 9.4 million new subscribers worldwide in the fourth quarter (ended Dec. 31, 2018), including 1.5 million in the United States.

Wedbush Securities analyst Michael Pachter contends Netflix will meet or exceed those numbers (perhaps gaining 1.7 million domestic sub additions) due to the global streaming success of original movie Bird Box, starring Sandra Bullock.

The post-apocalyptic thriller was streamed by 45 million households during its first week of release last month, according to Netflix. Nielsen said 26 million households streamed the movie in the United States.

Pachter, in a Jan. 14 note, said the sub data meant that about 40% of domestic subscribers and 20% of international subs streamed the movie, suggesting that a larger than normal number of subscribers were active at quarter end.

“We think that the unusually high activity depressed churn [subs not renewing membership], leading to upside to both domestic and international subscriber additions, and we think that our above consensus Q4 subscriber estimates may prove to be conservative,” Pachter wrote. “We expect Netflix to highlight the success of Bird Box as a subscriber driver on its [fiscal] call.”

At the same time, Pachter believes Bird Box was an anomaly. He said comparing the 45 million viewers to the opening weekend of a major theatrical release is misleading. He said that the nature of Netflix’s business model puts no additional cost on subscribers consuming content – making it far more analogous to the consumption of television programming, which also is subsumed by a subscription.

“While Bird Box definitely demonstrates the power of the Netflix platform to drive viewership of its originals, it will not necessarily lead to the long-term retention of subscribers,” wrote Pachter.

Netflix reports Q4 results at the market close on Jan. 17.

 

Netflix in Content Crosshairs

Lost in Netflix’s strong third-quarter subscriber growth numbers was the streaming media giant’s surprise revelation about the ownership status of its original content.

With Netflix spending upwards of $12 billion on original content in 2018 – underscored by $18 billion in third-party content obligations – the service said its alarming negative free cash flow is about to level off.

To assuage naysayers, Netflix (on page three of the shareholder newsletter), disclosed the ownership status of original programing – a dynamic that will continue to change as the Walt Disney Co. pulls original movies and related content from Netflix for its own pending over-the-top video platform.

Netflix says it has three major categories of content: licensed non-first-window content, such as “​Shameless​”; licensed original first-window content, such as ​“Orange Is the New Black”(​owned and developed by Lionsgate), “Ozark” (Sony Pictures Television) and “Insatiable” (CBS); and owned original first-window content from its own studio, such as ​“Stranger Things​.”

The latter category also includes “Big Mouth,” “The Ranch​,” “​Bright​,” “Godless,”​“The Kissing Booth​,” ​“3%,”​“​Dark,”​“​Sacred Games”​and “Nailed It​.”

Within those categories there are lots of subdivisions and per-territory treatments, but those are Netflix big three content buckets.

Netflix claims the classification of content will help reduce its reliance on outside studios, provide greater control over content it creates in-house (i.e., long-term global rights), increase brand/consumer product tie-ins, and lower costs (avoiding third-party studio mark-ups).

“To do this, we’ve had to develop new capabilities to manage the entire production process from creative support, production planning, crew and vendor management to visual effects, to name a few,” Netflix management wrote in the letter.

At the same time, Netflix is staking its future largely on proprietary content, whose popularity is at the whim of an increasingly fickle consumer.

Indeed, with the exception of Emmy-nominated “Stranger Things” and “Godless,” most of Netflix’s award-nominated original content is third-party sourced. The rest is a “hot mess,” according to Wedbush Securities media analyst Michael Pachter.

“We think it is downright quixotic of the company to presume that it can produce compelling content that will replace the licensed content it currently displays from major studios,” Pachter wrote in a note.

Pachter believes that should Netflix somehow default on its mushrooming debt, creditors would be hard pressed to convert any of the content into cash, particularly any of the capitalized content that is owned by others.

“It is simply impossible to comprehend how Netflix has been able to capitalize over $18 billion of its content spending with so few compelling owned original television series and films,” he wrote.

Analyst: Netflix Can Stop Negative Cash Flow with Price Hike

With more than 130 million subscribers and growing globally, SVOD behemoth Netflix has few problems – except an operating strategy bent on spending every free dollar (and more) it generates.

The service reported negative free cash flow (FCF) of $559 million in the most-recent quarter ended June 30 – part of a projected $3+ billion negative free cash flow in 2018.

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, FCF is the cash left over after a company pays for its operating expenses and capital expenditures.

And with Netflix on a breakneck pace to outspend ($13 billion this year) every competitor on original content, the SVOD pioneer continues to significantly exceed internal fiscal resources – typically a red flag to Wall Street.

But Netflix isn’t a typical company.

In Q2, the service completed a bond (debt) deal, raising $1.9 billion. At the end of the fiscal period, its gross debt stood at $8.4 billion, with a cash balance of $3.9 billion and a $500 million undrawn credit facility.

“We judge that our after-tax cost of debt continues to be lower than our cost of equity, so we anticipate that we’ll continue to finance our capital needs in the high yield market,” CEO Reed Hastings and CFO David Wells wrote in the shareholder letter.

Michael Pachter, media analyst at Wedbush Securities in Los Angeles, contends Netflix could remedy (break-even) its cash flow issue by raising the subscription price to $15 monthly.

“While an increase of $4 per month for domestic subs and $6 for international subs would add around $7.6 billion to revenue, more than offsetting negative free cash flow, we think that higher pricing would result in even higher content and marketing spending,” Pachter wrote in a note.

In other words, Pachter believes Netflix would continue spending like a drunken sailor.

While any mention of a price hike undoubtedly causes nightmares for Netflix brass following the well-documented fiscal debacle in 2011 when it raised – by 60% — the price of a popular hybrid streaming/DVD subscription plan. More than 800,000 subs dropped the service, and Netflix shares plummeted 75% in value, losing billions in market capitalization.

Pachter said anything charged above $15 per month would likely drive substantial profits, although, at higher prices, subscribers would expect more, and content license costs would likely rise.

“We estimate that at $20 per month, Netflix would generate around $3 per month in cash profit per subscriber,” he wrote.

In the meantime, Pachter expects Netflix to impose modest price increase every 18 – 24 months for the foreseeable future and thinks it could take as long as eight years to generate meaningful positive free cash flow.

To do so, Netflix has to keep adding subs at current growth levels – not unreasonable considering original programming continues to generate the bulk of online attention among consumers, according to Parrot Analytics.

“[Netflix] is likely to top out at around 200 million global customers,” wrote Pachter. “At that level, FCF would be $600 million per month, or $7.2 billion annually.”

Netflix reports Q3 financial results Oct. 16.