NFLX.US, the world's largest streaming company, saw its net increase in global paid subscribers decline for the first time in the first quarter of 2022, and management expected another 2 million fewer paid members in Q2, causing Netflix to fall more than 35 percent after its results, dragging down large U.S. technology stocks, Meta (FB.US) plunging nearly 8 percent, and streaming platforms Roku (ROKU.US) and Disney (DIS.US) down 6.17 percent and 5.56 percent, respectively.
Even Tesla (TSLA.US) boss Musk tweeted that "the wake-up virus makes Netflix look good", which seems to sentence Netflix - although the comments below obviously do not agree with the world's richest man.
In fact, Netflix's content may not be in line with Musk's "taste", but it still gets praise from the general public, and the fire's "Squid Game" is an example.
Notably, unlike the traditional practice of exporting content from the United States, Netflix tried to tailor content to the local market, which was successful.
As the company points out, in the past, U.S. entertainment companies viewed the "international" market as an export market for U.S. content, while Netflix chose to produce content in more than 50 countries, and three of its six most popular televisions are currently non-English works, including South Korea's "Squid Game" and an episode adapted from Chu Donggen's comic "Extreme Panic", and Spain's "Banknote House Season Four".
Therefore, the author believes that content is not the short board of Netflix, and market saturation and fierce competition are the main reasons for the decline in its users.
The Asia-Pacific market continued to grow
In the first quarter of 2022, Netflix's global streaming paid membership was 221.6 million, an increase of 6.7% year-on-year, but a decrease of 200,000 from the previous quarter, mainly due to the suspension of services in a major European country and the decline in local paid membership, which had an impact of -0.7 million on the net increase in paid members.
Excluding this impact, the net increase in paid memberships of 0.5 million is still well below the company's previous target of 2.5 million.
Netflix's main operating markets are divided into the United States and Canada (42.80% of revenue in the first quarter of 2022), Europe, the Middle East and Africa (32.73% of revenue), Latin America (12.76% of revenue) and Asia Pacific (11.71% of revenue).
Among them, Europe and the United States have the largest number of paid users, with members in the United States and Canada and Europe, the Middle East and Africa at the end of the first quarter of 2022 being 74.58 million and 73.73 million, accounting for 33.65% and 33.26% of the total number of paid members of Netflix.
In the first quarter of 2022, the Middle East and Africa region saw a net decrease of 0.3 million (or +0.4 million net increase after deducting a large European country), mainly due to the slowdown in business growth in central and eastern Europe due to the geopolitical situation.
Latin America saw a net decrease of 0.4 million paying subscribers, a decline similar to that of recent quarters, due to a number of factors, including macroeconomic weakness and price changes – average paying subscriber revenue (ARM) grew 20% annually (i.e. price increases) regardless of exchange rates.
The U.S. and Canada region saw a net decrease of 0.6 million paid subscribers, primarily due to price changes (but in line with their expectations).
The Asia-Pacific region grew smoothly, with a net increase of 1.09 million users, with several markets, including Japan, India, the Philippines and Thailand, all achieving ideal growth.
See the chart below, Season 2 is usually the off-season for Netflix user growth, but this year it arrived early in Season 1, and it seems that the development momentum of Season 2 is not ideal.
Netflix expects that assuming continued weakness in purchase intent and continued short-term impact from price movements, plus seasonal factors (net increases in paying users in Q2 are usually net increases in Q1, as we can see from the chart), the net decline of 2 million paid subscribers in Q2 2022, or an increase of about 1.5 million from the same period last year.
Is the decline in membership the end of the world?
From the analysis of the above markets, it can be seen that the decline in membership in Europe, Africa and the Middle East is related to a large country, the decline in Latin America is related to price increases, and the Asia-Pacific region still maintains the desired positive growth.
However, the decline in membership in North America (including the United States and Canada) is more worrying, after all, North America is its largest market, and the revenue per user is also the highest, which means that the profit is also the highest, and this market has begun to peak and fall, which will affect the prospects of Netflix.
How to overcome?
Netflix pointed out that relatively high household penetration rates – especially the large number of family sharing accounts, coupled with fierce competition (e.g. from Disney), are the main reasons hindering its income growth.
Netflix believes there are four points worth noting:
1) The growth rate of key markets (broadband home users) depends in part on factors beyond Netflix's direct control, such as the popularity of connected TV, the popularity of entertainment on-demand programs, and the cost of data, although the company believes that these factors will improve over time, and all broadband households are expected to become Netflix's customers;
2) In addition to the 222 million paying household users, Netflix expects more than 100 million household users to use Netflix's services in the form of shared accounts, including more than 30 million in the United States and Canada. Netflix believes that these 100 million customers who share accounts with other households may be expected to become their paying users, which is a space for them to expand.
3) Traditional TV and competition from YouTube, Amazon, and Hulu have been fierce for the past 15 years, but in the past three years, traditional entertainment companies have launched many new streaming services because they recognize that streaming is the future. But Netflix pointed out that its U.S. TV ratings have skyrocketed, or a measure of rising satisfaction, means that retention and revenue growth are supported.
4) Macro factors, including slowing economic growth, rising inflation, geopolitical events, and pandemics.
The company will expand its paying users by improving the quality of its programming and optimizing monetization rates, such as proposing paid packages that are more acceptable to shared account households.
The author believes that from the above data, it can be seen that the developed market is not fully saturated, and shared users are a development space that can be converted.
In addition, the author notes that the average monthly revenue per paying member in North America remains rising, while Europe, Africa and the Middle East remains stable, Latin America rises due to price increases, and Asia Pacific shows a downward trend – inversely proportional to traffic growth, suggesting that Netflix may be able to adjust prices to boost overall membership growth (especially in price-sensitive emerging markets).
In the first quarter of 2022, Netflix's operating margin was 25.06%, and management expects its operating margin for the second quarter of 2022 to be 21.5%, which means that Netflix's operating margin in the first half of 2022 may be above its target of 19%-20%, which should make room for price reductions – but the company expects the average user value in the second quarter to increase by 5% to not more than 10% (regardless of exchange rates).
Other development opportunities
Unlike Roku (ROKU.US) whose main revenue comes from platform services, and Disney's (DIS.US) revenue is more diversified, membership fees account for a large proportion of Netflix, which is the main reason why it relies heavily on paying users and changes in average user revenue.
At the press conference, Netflix, which has been opposed to adding ads to streaming services for many years, appeared to have loosened, with co-chief executive (CEO) Reed Hastings saying that Netflix is now "open" to offering advertising solutions in low-priced packages.
The CEO has been opposed to adding commercial overtones or other promotions to the platform, but now his position seems to have changed, saying that it makes sense to offer more users a low-priced option.
As I mentioned earlier, the 100 million shared accounts and the higher payment standards in Europe and the United States may lay the foundation for Netflix to provide a low-price strategy.
The reason why large Internet companies have achieved today's glory is mainly based on the advertising appeal brought by traffic, advertising revenue is the main source of income and profit of large Internet platforms such as Meta (FB.US), Google (GOOG.US), the cost of advertising revenue is not high, so the profit margin of these platforms is also very high.
If Netflix starts customizing low-cost packages for inserting ads, it should be able to compensate for the loss of the average price of users through advertising revenue, and expand the scale of users through flexible package allocation.
The CEO's words are reserved, but his position is loose, or it means that Netflix still has a good way out to choose as long as it wants, and North American user saturation is not the end.
In addition, while consolidating the content, Netflix has also made efforts in the field of games in the past two years.
In the first quarter of 2022, Netflix completed two acquisitions, including the acquisition of Scanline, a special effects company that has worked on Game of Thrones and several Marvel and DC movies, and game studio Boss Fight Entertainment, which used $125 million in funding.
In addition, Netflix also announced the acquisition of Next Games, a game company in Helsinki, Finland, which is expected to close the deal in the second half of 2022, which will be the third game company acquired by Netflix since the acquisition of another game studio, Night School Studio, last September.
The reason for such an aggressive acquisition of the game company is that Netflix wants to create a first-class game library for its members, improve the user experience, and plans to incorporate mobile games into its package, which is undoubtedly a major boost to user expansion.
It can be seen that Netflix has not reached the point of despair, turn an angle, put down persistence, there are still many choices, only depends on whether it is willing to change.
Author: Mao Ting