Author | Zu Yang
Despite expectations for a slowdown in subscriber growth, Netflix delivered a catch-up and startling earnings report.
According to the financial report, Netflix lost 200,000 global paying subscribers in the first quarter of 2022, far lower than the company's expected increase of 2.5 million, and even lower than the market's general expectation of 2.73 million, not only that, the loss of users will continue, Netflix expects the global paid subscribers to decrease by 2 million in the second quarter.
On financial measures, Netflix's revenue in the first quarter was $7.868 billion, less than analysts generally expected at $7.93 billion; up just 9.8 percent from $7.163 billion in the same period last year, returning to a new post-2014 low.
Because Netflix's business line is very simple, its user size and growth rate directly determine the stock price trend. After the earnings report, the after-hours stock price surged 25%, the stock price fell by $260, the lowest value since December 2018; since the beginning of the year, Netflix shares have fallen by 43.4%, the worst performing stock of the tech giant "FAANG" (the acronym for the five most popular technology stocks in the US market).
Internally facing a severe user growth crisis, and externally there are Disney, Time Warner, Apple, Amazon chase and block, how can Netflix "save itself"? Wall Street is aggressive, will Netflix stick to itself or compromise with advertising? Can the "growth textbook" still stage the classic "surprise attack" in the history of rise?
This time, Netflix wasn't so lucky.
Netflix's stock price trend so far in 2021
Sliding number of users
First, let's scan the overall 2022 Q1 financial report:
In Q1 2022, Netflix achieved revenue of $7.868 billion, up 9.8% year-on-year; operating profit of $1.972 billion, a slight increase from $1.96 billion last year; operating margin fell to 25.1% from 27.4% in the same period last year; net profit of $1.597 billion, down 5.9% from $1.706 billion last year, and net profit margin slipped to 20.3% Earnings per share of $3.53, down from last year but higher than analysts expected at $2.89; in Q2 2022, Netflix added -200,000 new subscribers worldwide and Netflix's global paying subscribers fell to 221.6 million from 221.8 million in the previous quarter.
The most noteworthy of these figures is the decline in new paying subscribers worldwide. This is the second time that Netflix's number of new subscribers has shown a trend of no increase but decline after October 2011, and the decline will continue into the second quarter.
In response to the "loss of paying subscribers for the first time in 11 years", Netflix gave the explanation: the geopolitical events of the Russian-Ukrainian conflict and the rise in the price of reading subscriptions in North America.
After the outbreak of the Russian-Ukrainian conflict, Netflix announced the suspension of all services in Russia, which directly led to the loss of 700,000 users, if this impact is not taken into account, the global paid new users were originally 500,000. Netflix also continues to pay for the withdrawal of its Russian business, and not long ago, Russian users launched a class action lawsuit against Netflix's withdrawal, demanding that Netflix pay 60 million rubles in compensation.
In the 220 million global paid subscribers, the number of less than 1 million users in Russia is a "dime", and what worries Netflix even more is the long-term "lying flat" in North America, the base of the company. Since 2021, the growth rate of the number of new paid users in North America has been facing a dark moment: negative growth in Q2, only 70,000 growth in Q3, 1.19 million new users in Q4, and in the first quarter of this year, the net increase in users has fallen to 600,000.
The main reason for the decline is the increase in membership prices. In January this year, Netflix once again raised the subscription fee of monthly subscribers in the United States and Canada, and the monthly fee generally rose by $1-2. Under Netflix's business logic of "revenue = membership price x number of paid users", when user growth is facing stagnation, price increases are the only option to guarantee revenue - the number of users in North America lost 600,000, but the overall revenue rose from $3.17 million in the same period last year to $3.35 million.
User growth has peaked and become an irreversible megatrend, and Netflix, including all streaming video platforms, is faced with how to activate the stock market and find new growth points.
On the one hand, Netflix optimizes the user experience to provide users with more diverse options. For example, the introduction of a double-like function to improve personalized recommendations and the overall experience according to user preferences; recently, Netflix said that the platform is studying another feature that allows members to transfer profile information to new accounts or sub-accounts, retaining browsing history and personalized recommendation data.
On the other hand, accelerate the layout of overseas localization content. According to the earnings report, three of the six most popular film and television works produced by Netflix are overseas dramas, namely the Korean drama "Squid Game" and "Zombie Campus 4" and the popular crime drama "House of Paper Money" adapted from Spain.
Squid Games
After "Squid Games" became a global hit, Netflix continued to dig into the Asian market, and the Asia-Pacific region was the only region to achieve positive user growth in the first quarter, with 1.09 million new users.
At the beginning of this year, the Korean love variety show "Single is Hell" produced by Netflix has just been launched and harvested countless topics and traffic around the world, and during the broadcast of the program, the popularity and commercial value of female guest Song Zhiya are comparable to "first-line female love beans".
In addition, Netflix also produced the Chinese drama "Hua Lantern Chu Shang" in Taiwan, it is understood that "Hua Lantern Chu Shang" starred Lin Xinru, Yang Jinhua, Xie Xinying, etc., the total production amount of 24 episodes in three seasons was 250 million Taiwan dollars (about 57.6 million yuan), and according to media reports, Netflix bought the exclusive broadcast rights of three seasons in one go, and the "sky-high" copyright broadcast fee also allowed "Hua Lantern Chu Shang" to earn back the cost before it was broadcast.
From here, we can also see the layout of Netflix in the Asian market: one is to deeply understand the aesthetics of Asian audiences, from the story plot to the cast selection are tailor-made self-made dramas, such as "Squid Game"; the other is to buy the copyright and launch exclusively on the platform, such as "The Beginning of the Lantern".
Streaming red sea forced Netflix to compromise with advertising?
Although Netflix can dominate the streaming media market by content quality, "two fists are difficult to defeat four hands", under the "wolf pack" such as Disney, Time Warner, Apple, and Amazon, Netflix's living space has been further compressed.
Parrot Analytics shows that under the fierce competition in the streaming market, Netflix's content market share fell from 51.4% in the first quarter of 2020 to 43.6% in the fourth quarter of 2021, while the market share of rivals Apple TV, HBO Max and Disney+ increased from 13.5% to 21.4%.
Market share of original content
The competition in the streaming media market has become more and more intense, and the joint merger and acquisition of "big fish eating small fish, small fish eating shrimp and rice" has become a way for competitors to achieve breakthrough.
On March 17, Amazon acquired MGM, one of the eight major hollywood studios in the United States, for $8.45 billion, which is also the second highest acquisition amount in Amazon's history since amazon acquired Whole Foods Organic Supermarket for $13.7 billion in 2017, and it is enough to see the determination of Amazon, an e-commerce giant, to enhance its storytelling ability.
After the acquisition is completed, the century-old MGM will bring 4,000 movies and 17,000 hours of TV shows to Amazon Prime Video, including classics such as the "007" series, "Gone with the Wind", "The Silence of the Lambs", "The Hobbit" and so on, and will also promote Prime Video with more than 55,000 films, far more than the current 20,000 Netflix.
Just ten days ago, Discovery Discovery Media Group bought a 29 percent stake in Warner Media from U.S. telecom giant AT&T for $43 billion and merged to form a new company, Warner Bros. Exploration. There is a good chance that Warner's HBO Max and Discovery's Discovery+ will merge into one service.
At the end of last year, HBO Channel had 73 million subscribers with HBO Max and worldwide, while Discovery's Discovery Channel and Streaming had 22 million subscribers. Combined, Warner Bros. Exploration, which has nearly 100 million subscribers, will be a formidable rival to Netflix (220 million subscribers) and Disney+ (130 million subscribers), splitting the streaming pie.
New forces are emerging, and old players are not far behind. Since the beginning of this year, Apple TV, which has been smashing heavy money on content, seems to have come out of the "water retrograde period", the exclusive drama "Life Cutting" and "Pinball Game" have won a lot of sound, and the exclusive release of "Hearing Girl" won the Best Picture Award for the first time. In contrast, Netflix, since the first time in 2014, has been in the Olympic Games for eight consecutive years, and this year there are two works shortlisted, and finally it is still out of the cold.
"Hearing Girl"
Ahead of the earnings release, many investors were anxious about Netflix's future growth. At a conference in early March, a Morgan Stanley research executive told Spencer Neumann, Netflix's chief financial officer (CFO), "I have to ask you about advertising. Otherwise, I wouldn't be able to leave this room alive."
For a long time, de-advertising has been the golden rule that Netflix adheres to, using high-quality content to attract users to pay, and the positive feedback of users is fed back into content production, so as to avoid using advertising to make a profit - this model has also attracted loyal fans such as IYouteng in China, but unfortunately, the strategy of de-advertising has not given Netflix a future of stable growth.
Advertising mode or membership mode? This model dispute, which has plagued domestic video platforms for a long time, is now being repeated overseas. In the earnings call, Netflix co-CEO Reed Hastings said Netflix is now "fairly open" to lower-priced subscription plans that offer ad support, and doesn't rule out the possibility of launching an option with ads. In early March, Disney announced that the Disney+ streaming service would reduce the price of the package tariff by introducing ads, and the option with an advertised version would go live at the end of this year.
With the increasingly fierce competition in the overseas streaming media market, the next blockbuster Netflix after "Squid Games" has come to a difficult time.