Netflix's house of cards wobbles
Netflix has 130 million subscribers. Its programmes have earned 112 nominations for the upcoming Emmy awards. And it just announced revenues of $3.9bn for the second quarter of 2018 - a year-on-year increase of 40pc. So why did shares drop more than 14pc in after-hours trading after the company announced its quarterly earnings last week?
Netflix's ongoing success is based on the need to grow users. And it fell short of its targets on that front. It only attracted 5.2 million new users. Pretty good, but some way short of the 6.2 million forecast. The company needs to keep growing its customer base to cover the borrowing needed for its programming and marketing costs. Netflix spent $10.1bn on programming costs in the last 12 months. And its latest results show that marketing is its fastest-growing expense. Can it bet on constant growth to cover such heavy spending? And is this a temporary wobble, or a sign that Netflix is coming to the end of a period of incredible growth?
One of Netflix's biggest problems is that it has already picked all the low-hanging fruit in its most mature markets. It now needs to court an older demographic that's less likely to get their TV over the internet. There's no easy solution to this, but it's likely there'll be more period dramas designed to appeal to the over 55-year-old age bracket. It's also likely that Netflix will source partners that will allow them to access new subscribers via bundling. The company says bundles continue to be a "high-performing additional acquisition channel" and expects to continue to add such deals with the likes of Telefonica in Spain and Latin America and KDDI in Japan.
International expansion is, of course, an obvious focus for the company. And that means international programming. It has made plenty of non-English dramas, like 3% from Brazil, The Rain from Denmark and the Indian drama, Sacred Games, inset. These efforts are working, but not as quickly as expected. Could Netflix be limited by the affordability of the product relative to relative incomes in developing economies? The company's chief product officer, Gregory Peters, doesn't think so. "I would say we're far from reaching a limit in terms of the addressable market given the pricing structures we have right now," he said. "We've got a lot of room to grow in a reasonably affluent part of the society in India and other markets around the world."
Pricing aside, it's unclear whether a US-based company can create content that appeals to audiences in different countries. Netflix's French series Marseille, for example, was dismissed as 'cowshit' by Le Monde. The New York Times offered a more nuanced critique. It said the show was "proof that the most risible cliches of dark American cable and streaming drama can be exported as easily as fast food". Sustainable subscription growth may require more than bland and homogenised fare.
In many markets, Netflix also faces increased competition. Aside from the traditional TV players, Amazon, Hulu, Google, Facebook and Apple are all dipping their toes into original programming. Disney and AT&T are looming large and even retail giant Walmart is rumoured to be considering launching a subscription streaming video service.
But Netflix believes there's still plenty of room for everyone in the entertainment sector. "The market for entertainment is so big that there can be multiple firms that are successful," said Spencer Wang, Netflix's VP of Finance. "So you've heard us talk in the past about how we've been able to grow dramatically in the US, and HBO and other networks have also similarly been able to grow at the same time. So it's a very large market."
And Netflix is broadening out of TV-style content. It has been making its own movies for some time and is working with a raft of big name directors; Martin Scorsese, Alfonso Cuaron, Paul Greengrass and Michael Bay will all make their next films for Netflix.
But interestingly, it will soon launch a comedy channel on Sirius. The radio channel will broadcast highlights and stand up excerpts from Netflix's original comedies. No doubt, it will function as a promotional channel, using existing assets to drive a new slew of subscribers.
Netflix's mission used to be to become HBO faster than HBO could become Netflix. It's a symptom of the company's huge success that the competition is no longer an individual cable channel. Instead Netflix is in a quarterly race against time and a host of other players to keep attracting new users. Can it do it? Stranger things have happened.
Sunday Indo Business