Netflix is now two companies rolled into one

Netflix is now two companies rolled into one
While Netflix doesn't report revenue or user growth by individual countries, the fact that it is hiking prices in the US, UK and France is a strong hint of where it is hitting a ceiling.

Is Netflix still the high-growth tech stock that changed our expectations of TV and the power of subscriptions over ads?

Netflix is now two companies operating at different speeds.

That was the clear indication from the streaming giant’s third-quarter earnings report on Wednesday evening. Although topline figures were positive and ahead of expectations (8% revenue growth to $8.54bn and 8.8 million new subscriber additions) the details reveal an emerging split.

While the company is rapidly growing in emerging markets, it is plateauing in established markets like the US, UK and France.

And for those established markets, there is one tactic that Netflix is very likely to keep turning to: price increases.

Old Netflix v New Netflix

The story Netflix likes to tell, of course, is their being a high-growth juggernaut. That’s certainly true in Latin America (up 12% to $1.02bn) and Asia-Pacific (up 7% to $889m). It’s EMEA performance was also strong (up 13% to $2.69bn), but that’s a huge region with the potential for huge variations within.

In the US and Canada, however, growth was up by a more modest 4% to $3.74bn for the three months ending 30 September. It is worth noting the North American market still accounts for nearly half (44%) of Netflix’s total revenue.

No wonder, then, that Netflix included an announcement of price increases with this earnings report. While Netflix doesn’t report revenue or user growth by individual countries, the fact that it is hiking prices in the US, UK and France is a strong hint of where it is hitting a ceiling.

The company said: “In the US, our ads ($6.99) and our Standard plans ($15.49) will stay the same, while Basic will now be $11.99 and Premium $22.99. For the UK and France, our pricing for Ads/Basic/Standard/Premium are UK £4.99/£7.99/£10.99/£17.99 and 5.99€/10.99€/13.49€/19.99€, respectively (like the US, our Ads and Standard plans in UK and France are unchanged).”

In terms of subscriber additions, the picture is more uniform for Netflix (there were significant additional net gains in all main markets), although regional variations show a company operating at different speeds. In emerging markets, it is still able to point to new user growth on the basis of marketing and new content deals. But in established markets like North America, Netflix’s war on password sharing between different households is the significant driver.

“The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention,” a spokesperson for the company said. “Going forward, we’ll continue to refine and optimise our approach to convert additional borrower households into either full-paying members or extra members over the next several quarters.”

In other words, another short-term trick that allows Netflix to keep telling the high-growth story for another quarter. But eventually the password crackdown will end.

Other than that, subscriber growth is likely to remain sluggish for one very simple fact: Netflix has probably hit the upper limit for paid subscribers in major English-speaking markets.

And, as The Media Leader noted after the sudden exit of Netflix’s first global ad sales chief Jeremi Gorman, the streaming giant’s idea to introduce a cheaper ad-funded tier has been problematic. In terms of customer acquisition, how many people are there, really, that are willing to save a few dollars or pounds per month in order to watch Netflix with ads? And, in terms of selling ads, how attractive is it, really, for major brands to know that their most affluent consumers are not on Netflix because they’re paying not to see their ads?

Netflix on developing ad formats: sidelining Microsoft?

As for advertising, Netflix neglected to mention the exit of Gorman, despite its claim in the earnings report that “[Netflix advertising] should be a multi-billion dollar revenue stream over time.”

Its latest idea to achieve that is to launch new formats, such as title sponsorships with Frito Lay’s Smartfood, which presented the new season of Love Is Blind. Meanwhile, T-Mobile and Nespresso were named as sponsors for The Netflix Cup, its first-ever live sports event featuring athletes from Formula 1: Drive to Survive and Full Swing, streaming live on 14 November.

As teased at a fringe event during Advertising Week New York, Netflix also confirmed that it is launching an “ad product for members who love to binge”.

“So if you’re watching a few episodes in a row you’ll be served a hero spot that says “the next episode is commercial free, made possible by XX brand,” the company revealed.

And how’s this for a casual mention straight afterwards: “We’re also investing in our own sales team and technical infrastructure to complement Microsoft’s capabilities.”

Remember that Netflix hurriedly announced a move into advertising in spring 2022 after falling subscriber numbers. Instead of developing its own ad stack — which would enable it to develop innovative products that solve Netflix’s substantial challenge of having to shoehorn ads into a vast library of content created specifically to be viewed without ads — the following July, Netflix turned to Microsoft to be its global tech and sales partner.

A year later (July 2023), someone let it be known to The Wall Street Journal that Netflix wanted to “restructure” its partnership with Microsoft, apparently after Microsoft had agreed to a “revenue guarantee” that it would struggle to fulfil because demand for cheaper Netflix with Ads has been so much lower than expected.

Short-term tactics for a long-term challenge

Which brings us to what may be the most concerning metric of all within Netflix’s earnings: average revenue per user (ARPU). It’s no longer 2013, when Netflix had the TV streaming market to itself. The market is now fiercely competitive with SVOD players: Amazon Prime Video, Disney+, Paramount Plus, Max, and broadcasters’ VOD.

As we reported earlier this week, it was only due to massive discounting that Disney was able to steal a march in the UK this summer in terms of driving new subscriptions. Paramount Plus, which launched in the UK in the winter, benefited from an add-on deal with Sky for Sky Cinemas to receive the service at no extra cost.

None of these short-term tactics to gain market share from each other are likely to help any of them increase ARPU.

Little surprise then that Netflix’s ARPU was close to flat in all markets.

US and Canada: $16.29 (up 1.8%); EMEA: $10.98 (up 1%); Latin America: $8.58 (up 3%); Asia-Pacific was marginally down (-0.5% to $7.62).

And there lies the ongoing conundrum for Netflix: is it still the high-growth tech stock that changes our expectations of TV and the power subscriptions over ads? Or is it now just another legacy media business that is struggling to scale an online ads business and is testing the limits of how much to increase prices?

As its latest earnings reveal, Netflix is both. Or, to use a word popular in Silicon Valley, it’s a hybrid.

Jeremi Gorman exit: will Netflix ever truly embrace ads?

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