Netflix faces a dystopian future in which hits do not guarantee growth

Netflix seems to have the wind in its back, heading for the last quarter of 2021, with its anti-utopian Korean drama Squid game attracting millions of viewers and 150 original programs ready for release, including Don’t look up, starring Leonardo DiCaprio and Jennifer Lawrence.

This was, according to the company, its “strongest content ranking ever”.

But stellar new releases were not enough to give Netflix a significant boost to subscribers in the fourth quarter. The pioneer of video streaming said on Thursday that 8.3 million new subscribers signed up for the service in the fourth quarter, the lowest number it added in 2017.

Worse, he predicts it will add only 2.5 million subscribers in the current quarter – less than 4 million last year and well below its first-quarter performance in each of the past five years. Investors dumped shares on Friday, dropping nearly 22 percent to $ 397.69. They have fallen by more than 40 percent from the height of Squid game mania in November.

Beyond the weak guidelines, the company’s performance raised bigger questions about its business model. Among them: what happens if popular new shows are no longer enough to lure many new Netflix subscribers?

Squid game came out a week before [the fourth quarter] started, but the biggest hit of all time on Netflix was not enough to add subscribers, “said Laura Martin, an analyst at Needham & Co, which has a rating for selling shares. “Content is no longer a competitive advantage”, especially for traditional media groups that invest heavily in their own streaming services.

Netflix is ​​expected to spend $ 18 billion on content this year, according to Morgan Stanley, as it seeks to maintain its lead over competitors including Disney Plus, AT&T’s HBO Max, Apple TV Plus, Amazon Prime, ViacomCBS’s Paramount Plus and other. The FT estimates that eight U.S. media companies will spend $ 140 billion on content this year as streaming wars intensify and analysts expect spending to double-digit over the next few years.

Investors seem to be waking up to the high cost of streaming business – and often the short shelf life of content in services. Following the Netflix report, analysts at MoffettNathanson noted that the “rate of attenuation” of streaming content is “incredibly fast”, especially when popular programming can be interrupted overnight.

This means that “streamers must constantly spend on new content to attract and retain new members, and any delay in these costs leads to a softer quarter” for subscriber growth, the company said in a note.

“We doubt whether streaming is a good business or not,” said Michael Nathanson, an analyst at the firm. “It requires a ton of fresh content.”

Netflix said its higher content spending cut operating margins to 8% in the fourth quarter, down 6 percentage points from a year earlier. Increasing its margins would significantly mean spending less on content that many consider unlikely given the intensity of competition in the streaming market.

Netflix raised its price in the United States this month to $ 15.50 per month from $ 14 – a premium to $ 8 per month, charged by Disney Plus. Netflix employees stressed last week that the outflow of subscribers decreased in the fourth quarter and said that the plans for perfection and positive free cash flow this year are on the way.

Netflix, Disney and other streaming companies made huge profits to subscribers during the blockade in 2020, but a return to more normal routines slowed growth.

The company blamed the disappointing growth of subscribers in part on “macroeconomic difficulties in several parts of the world”, especially in Latin America. It says competition “can affect our marginal growth”, a rare acknowledgment that it faces pressure from other streaming services. But she added that she continues to grow in every country where her rivals have started.

Reed Hastings, CEO of Netflix, said it was difficult to determine the reason for the delay because “Covid made so much noise.”

But Martin said Netflix underestimated the impact of growing competition on its subscriber growth. “Part of the problem is that Netflix doesn’t think they have a problem,” she said. “I came to the conclusion that the competition is real, but they have not yet come to that conclusion.”

She said the streaming market will become more stable after a period of consolidation, which she said will happen in three years or sooner.

“Three [streamers] “They have to go bankrupt and three have to survive,” she said. “And then the content can become more reasonable in terms of its price.”

For his part, Hastings said there was no reason to question the company’s trajectory. “We remain calm,” he said.

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