Author | Zu Yang
This morning, Netflix released its first quarter 2023 earnings report, and the data indicators that fell everywhere were shocking.
The financial report shows:
In Q1 2023, Netflix achieved revenue of US$8.162 billion, a year-on-year increase of 3.7%, the second lowest revenue growth rate in years;
Operating profit was US$1,714 million, down 13% year-over-year, and operating margin was 21%; Net profit was US$1.305 billion, down 18% year-on-year, and net profit margin was 20%;
Diluted earnings per share of $2.88, below market expectations of $3.01;
Only 1.8 million new Netflix subscribers were added in the quarter, down from 2 million expected by Wall Street analysts, and Netflix now has 232.5 million paying subscribers worldwide.
At the same time, Netflix announced in its earnings report that it will end its 25-year business - DVD rental service later this year, and after releasing the last batch of DVDs on September 29, it will close its related business website DVD.com.
After the earnings report, Netflix's stock price fell by 12% at one point.
Q1's performance fell short of expectations. Just like Netflix said in its earnings report, this quarter handed over "powerful" content: "You", "Murder Mystery 2" and "The Bund Islands" and other return dramas are hits, and the new drama has a popular Korean drama "Dark Glory" all over the world, the first one set a viewing time record for two consecutive weeks, topping the world's first non-English drama, and the second one once crowded the server despite the expansion on the day of its launch, and topped Netflix's global ratings list in three days after its launch.
However, the strength of the content and the substandard performance formed a deviation and misalignment. This deserves greater alarm among investors - Netflix still has the ability to make explosive models, but the impetus that blockbusters can bring to performance has become limited.
Blockbusters are useless?
One of the good news in this earnings report is that there are 1.8 million new users worldwide, of which the user growth indicator in the Asia-Pacific region is 85% higher than expected, which also confirms to some extent that Netflix's globalization strategy has taken another step forward.
According to the financial report, the growth of the "base camp" North America has peaked, with 100,000 new users in the quarter, 640,000 new users in Europe, the Middle East and Africa, and Latin America has become the "hardest hit area" for user loss in this quarter, a decrease of 450,000, because the "paid sharing" pilot was opened in Latin America, which affected the increase in users. The Asia-Pacific region has already carried the banner of user growth, adding 1.46 million new users and a total of 39.48 million paid users.
In the Asia-Pacific region, South Korea has the closest relationship with Netflix, and South Korea is also the most successful market for Netflix in the Asia-Pacific region. In 2019, Netflix invested in the production of the first original Korean drama "Kingdom" combined the color of American dramas with the struggle for royal power, not only refreshing Korean audiences, but also caused heated discussions around the world, the global popularity of the Korean drama "Squid Game" in 2021 further made Netflix's content originality and production ability deeply recognized, by the beginning of this year, "Dark Glory" swept the world again, Netflix has found the password to mass-produce popular Korean dramas, and attracted a group of loyal users.
Don Kang, vice president of content at Netflix Korea, has said that 60% of the platform's users consume Korean content. In other words, more than 100 million users watch Korean content.
Media Partners Asia platform report shows that Netflix will invest $1.9 billion in local content in the Asia-Pacific region this year, a year-on-year increase of 15%, South Korea is the most important prospective market; In mid-January, Netflix announced plans for Korean film and television productions, and 34 Korean movies and dramas will be launched this year.
A still from "Dark Glory"
But at the same time, new problems are gradually emerging - Netflix has the ability to scale explosive models, but the blockbuster effect is failing.
It is also a global hit, and the return that "Dark Glory" brings to Netflix is somewhat dwarfed by the "Squid Game" in 2021.
"Squid Game" drove up financial results in the quarter, with 4.38 million new users and investors willing to pay for the hit, and its stock price rose 8.4% in the month after the show's launch, and its market value soared by $19 billion.
Looking at "Dark Glory" again, when the show was launched, Netflix specially split, divided a season of 16 episodes into two seasons, launched the first season on December 30, 2022, and released the second season on March 10, the broadcast time is covering the first quarter, the purpose of this is also obvious, to extend the discussion heat, maximize the long-tail effect of the series, and continue to attract new users to pay for subscriptions.
The purpose is good, from the number of broadcasts to the popularity of word of mouth "Dark Glory" did exceed expectations, but the influence of the content did not translate into real growth, on the day the series was launched, Netflix's stock price fell nearly 2%, and the financial data of revenue and profit not only did not increase but declined.
The reason is not difficult to understand, now the global streaming media battle is becoming more and more intense, the market is becoming more saturated, user growth is also facing bottlenecks, Disney, Amazon, Apple and other streaming media have thrown money to smash content to attract users, streaming media into the "involution" mode. Various streaming media platforms also allow users to have more choices, loyalty to a single platform declines, and stickiness to content and platforms is reduced.
Today, when a blockbuster can no longer solve the problem and bring rapid growth, Netflix needs to find more tricks to achieve "Jedi Strikes Back".
Advertising has high hopes
It turns out that Netflix's business model is simple and straightforward - good content in exchange for users, users bring revenue. However, with the impact of fluctuations in the external environment, the high cost of content, and the encirclement and blockage of peer competitors, Netflix has also taken various measures in the past two years to continuously adjust its original business model.
For example, increase or decrease membership pricing. When Netflix implemented its globalization strategy in 2016, it adopted a unified pricing approach in most countries, and as the layout became more extensive, Netflix's membership pricing was also adjusted "according to local conditions". For the established content and user market, increase the price to obtain revenue and invest in content production; When faced with fierce competition and users cannot rise, they do not hesitate to use price cuts to please users.
Earlier this year, Netflix cut subscription prices in 116 countries and territories in the Middle East, Sahara, South Africa, Europe, Latin America and Asia, with prices dropping 20 to 45 percent in most regions, according to Wells Fargo. For this price reduction move, Netflix also responded in the financial report: in December 2021, it lowered the price of packages in the Indian market, bringing nearly 30% user growth, so lowering the subscription fee again will help maximize long-term revenue.
Paid sharing is another important initiative. Whether it is domestic iYouteng, or overseas Netflix, Disney, "account sharing" is a hard thorn in the heart of the streaming media platform, Netflix has revealed that more than 100 million families are sharing accounts, one person pays, relatives and friends enjoy, which greatly destroys member investment and platform business capabilities.
To improve the situation, Netflix first tried the "paid sharing" strategy in some Latin American countries, and if users wanted to share accounts, they would charge an additional fee.
From the current implementation effect, "paid sharing" has caused user loss in the short term, and the number of users in Latin America has decreased by 450,000, but Netflix also mentioned that the growth of membership and revenue in Latin America brought by sharing will be reflected in the second or third quarter, and on this basis, the scope of paid sharing will also be expanded to radiate more regions including the United States.
Pricing adjustments and paid sharing are also improvements within the membership model, and Netflix's big step is to launch advertising services to expand advertiser revenue beyond membership revenue.
Netflix management was also strongly resistant to "adding advertising" in March last year, and now in a year, the advertising business has initially improved, and it is likely to become a major boost to platform revenue in the future.
Last November, Netflix launched Basic With Ads (ad subscription plan), which costs $6.99 per month, three dollars less than the basic version, but requires 4-5 minutes of ads per hour. The reason for the launch of the advertising business is simple, on the one hand, to satisfy those who want to watch videos at a low price, and on the other hand, to increase advertising revenue.
For the performance of the advertising subscription plan, Netflix also said in the earnings report that it was "very satisfied." Initial user growth, Bloomberg reported that Netflix's ad-inclusive subscription package has reached 1 million monthly active users in the U.S. in the second month of launch, and the total ARM (subscription + ad) of the advertising package in the U.S. market has exceeded the standard package version without ads.
Advertiser acceptance is also increasing. Bloomberg mentioned that Netflix has completed the expected delivery to advertisers. In addition, Netflix is also providing more convenient services for advertisers, launching a programmatic private market, using Microsoft's sales platform to display Netflix's advertising inventory to facilitate advertisers' choice.
Zooming in to the development of the global advertising market, the potential of the video streaming advertising business is worth looking forward to. Global ad spend will grow 2.6% in 2023 according to the 2022/2023 Ad Spend Outlook released by the Global Advertising Research Center (WARC), with the entire video streaming industry (including ad-supported VOD/AVOD, broadcaster VOD/BVOD and all OTTs) expected to outpace the overall market, with the AVOD industry expected to grow 7.6% this year to $65 billion. As more money goes to video streaming, Netflix's advertising business has more potential to grow.
Whether it's membership or advertising, content is always fundamental to streaming. Judging from the next content list to be launched, Netflix still has a good hand: the popular gothic American drama "Wednesday" will launch its second season before the end of the year, the benchmark drama "House of Bills" derivative drama "Berlin" will also be launched, and the sequel to the blockbuster "Squid Game", etc., there are a lot of "explosive products" content, and I hope that these dramas can bring practical effects to the performance boost.