Issue link: https://maltatoday.uberflip.com/i/1202928
23.01.2020 15 BUSINESS Netflix's Q4 2019 US subscriber 'miss': the storm after the calm? ALL media, entertainment and tech eyes focused today on Netflix's Q4 2019 earnings re- port, hoping to learn how Net- flix would fare in its first few months of direct US competi- tion by new mega-streaming entrants Disney+ and Apple TV+ (both of which launched in early November). e short answer? A mixed bag. e company beat the Street's reve- nue expectations (earnings per share came in at $1.30 rather then the expected $.53), and also far exceeded forecast in- ternational subscriber growth numbers (8.33 million versus the forecasted 7 million). But the big story - sure to have Hollywood and Wall Street water coolers buzzing - is that Netflix also missed big on its US domestic subscriber growth numbers (420,000 net subscrib- er additions versus the forecast 600,000). And, importantly, that Netf- lix, in its quarterly shareholder letter, chalked up that "miss" to "probably [being] due to our recent price changes and to US competitive launches." CEO Reed Hastings more pointedly conceded that Disney+ "takes a little bit away from us" in Net- flix's posted Q4 2019 earnings interview led by Guggenheim analyst Michael Morris. at is significant. First, Net- flix itself concedes that the much-heralded streaming wars likely are directly and adverse- ly impacting its own business. Second, Disney+ only directly competed with Netflix for about 50% of Q4 2019 (it launched across the US on November 12 and is reported to be an early breakout success; Apple TV+, not so much). ird, Disney+ only launched in a small handful of international markets (four, compared to Netflix's 200+), so its immediate international im- pact is naturally less meaningful so far. Disney is now accelerat- ing its European rollout to capi- talise on its early success. Fourth, this was Netflix's third straight quarter of undershoot- ing its US subscriber numbers, and the company also saw in- creased "churn" in Q4 (some- thing to be watched closely in the coming quarters as the streaming wars mature). Fifth, international subscribers likely generate less revenue - and cost more to acquire and retain - than US subs. Sixth, Netflix's own statement about potential adverse impacts of "recent price changes" do not bode well for the prospects of Netflix being able to raise pric- es in the future to drive revenue growth, although both chief content officer Ted Sarandos and chief product officer Greg Peters strongly signaled that future price hikes remain on the table. In Sarandos' words in the earnings interview, "If we're putting hits on the board ... then the more frequently we can go back." ose upward pricing ticks certainly did the trick in the past. But those tricks may be signif- icantly more difficult to pull off in a world where Disney+ and the other new streaming goli- aths hold unique power to un- dercut Netflix pricing at every turn due to their significantly more flexible underlying busi- ness models. Remember, Disney+ launched at $6.99 per month and Apple TV+ at $4.99 per month (free to buyers of Apple hardware). Netflix drives only one reve- nue stream (and continues to insist that it will not add ad- vertising). e others do not. ey boast several. And their streaming services can serve as loss leaders as a result (I have written about this several times for Forbes, including this analy- sis which delves into this point more deeply). at's predatory pricing 101. And, according to a recent survey by PC Magazine, pricing still matters most to streaming consumers. On the issue of content, in the earnings interview, CFO Spence Neumann confirmed that Net- flix spent over $15 billion in 2019 and plans to increase its content spend this year (a $17+ billion number has been wide- ly reported). Neumann pointed out that over 50% of Netflix's cash spend is now on its origi- nals. In his words, "We are scal- ing into the business. e future of this business is originals." In particular, Netflix plans to sig- nificantly expand its large scale feature films and animated films for 2020. As for the early impact of Friends leaving Netflix at the end of 2019, Sarandos answered that there has been "nothing that we've seen or can measure." He insisted that "Our custom- ers will find their next favorite show." Analyst Michael Morris ended the earnings interview by asking each participating Netflix exec what is most misunderstood about the company. Perhaps CFO Neumann gave the most interesting answer. "What's most misunderstood is the business model, and what you see in our cash flow generally and folks thinking we are losing money if you will when we've shown that we're increasing our profitability." True enough. At the same time, however, Neumann finished his closing statement saying that Netflix is growing "a very profitable busi- ness which will over the years become self-funding." And, that is the question. When will that time come? Certainly not anytime soon, as Netflix's debt burden continues to balloon and now exceeds $15 billion. So profitable, yes. Cash flow posi- tive, no. Meanwhile, streaming's hy- per-competition continues to grow. And while today's stream- ing wars may not be a zero sum game (make no mistake, execu- tives in the trenches of all major streamers feel it is all out war), it is also true that consumers do have limits to what they are willing to pay for their enter- tainment options. It only stands to reason that more month- ly subscription choice, means more potential impact on Net- flix (and all others). at's streaming's new reality as 2020's salvos continue to hit.