Netflix Beats Revenue, But Long Term Questions Still Remain

01/21/2020

Streaming Wars Get Intense

The next two weeks mark an important timeframe as major US firms release their quarterly earnings. Netflix reported earnings after market close today, and here are the stats:

  • Earnings per share: $1.30
  • Revenue: $5.47 billion vs. $5.45 billion expected
  • Domestic paid subscriber additions: 550,000 vs. 589,000 expected,
  • International paid subscriber additions: 8.33 million vs. 7.17 million expected

The streaming giant lost about $1.7 billion in the quarter. The firm maintains that its billion-dollar losses peaked in 2019 and that it is now pivoting to a position that is free cash flow positive.

“We’re on the glide path, slowly, towards positive free cash flow,” Netflix CEO Reed Hastings said on the company’s earnings call. “We’re excited about that but that’s not coming from shrinking back our content spending. That’s coming from the increase in revenue and operating income.”

Word on the street has been that having advertisers might turn Netflix profitable soon, but Hastings reiterated on the earnings call that the firm has no plans to introduce advertising to its business and that its focus remains on “streaming and customer pleasure”. Hastings also added that it would be an uphill battle for the firm if it were to start competing for ad space with the likes of Facebook, Google, and Amazon.

I think the move makes sense because launching advertisements could potentially lead to bad outcomes for everyone. Why? Because the launch of ad space on a service with millions of subscribers would increase the total supply of potential ad space and could drive down the price of advertising for all platforms that are showing ads. Moreover, it will put off customers that are paying members, who might think that they are better off enjoying free content and occasionally watch ads instead.

Either way, I’m sure there is some economist working for Netflix, who has run the numbers on the potential revenue drop/gain the firm would have if it decided to launch ads and compared it the cross elasticity of the Netflix’s service to that of other streaming platforms.

The biggest threat for the firm in the North American markets has been the launch of Disney+ and Apple TV+, billion-dollar firms that have enough cash on hand to burn to up their game when it comes to content creation.

I think the stalled subscriber growth in North America is not necessarily an indicator of Netflix’s poor performance, but an indication that maybe there is enough content out there to choose from when it comes to entertainment. Perhaps the industry is approaching a saturation point with so many firms competing for eyeballs.

Over the long term, Netflix still has about $14 billion in junk debt (bonds) and it’s uncertain whether recurring revenue from subscribers will be enough to pay it down or achieve profitability.

Here’s another point of view: I think that Apple TV+ and Amazon Prime Video aren’t really competing with Netflix. Why? Because I don’t think the respective firms are in the content business.

Amazon’s Prime service is rather popular in the US, as customers can enjoy 1-day and in some cases two-hour deliveries by paying $119/year. By charging for Prime, the firm effectively fronts the shipping cost for the entire year, and the video and music services that come with it are merely the sprinkles on the ice-cream.

Think about it, would you pay $119 a year to just get things delivered in a day? Perhaps. But you are far more likely to pay that amount if I tell you will get access to some other cool stuff like movies, music, and more. It’s the incentive that I think pushes the customer over the edge when they are thinking about buying a Prime Membership.

For Apple, the streaming game is rooted in the premise of its product game: brand exclusivity. If you’re an android/windows user, you simply will not be able to enjoy the perks and benefits of Apple TV+. By limiting the potential customer market to consumers that already have Apple products, Apple effectively doubles down on its promise of exclusive, superior content that is available for entertainment.

This leaves Disney and HBO, which I think are the firm’s truest competitors because they are really in the content business. For Apple and Amazon, the streaming line may or may not add to bottom-line revenue and profitability, but it becomes a perk rather than a core product. The case is different when you’re literally a production house that owns different franchises with a cult-like fan following.

Apple earnings come out towards the end of the month, and data about its streaming platform will give us some insight into how well Apple is positioned to take on these streaming giants. Despite the launch of these services in the last year, Netflix’s revenue beat and Hastings comments are assuring investors that the streaming wars might be getting too intense, but the firm is armoured up to take on the challenge.

Netflix has satiated investors with revenue that beats market expectations, but long term questions about profitability still remain. With 24 Oscar nominations in 2020 compared to 14 in 2019, content remains king for Netflix.

Shares traded up after market close, up about 1.62% at $345.75


Viral

Markets have begun to price in the fear of a viral outbreak of a pneumonia-like virus that originated in China is spreading.

Health officials said that a man in Washington state has been diagnosed with the new Wuhan coronavirus, the firm case to be confirmed in the US that has sickened many in Asia.

In China, over 198 cases have been reported, with four confirmed deaths. With the lunar new year on January 25, the worry is that frequent travel to and from Asia might lead to an outbreak of a Virus that is SARS-like, and cause a slowdown in global economic growth.

The last time something like this happened, it was the SARS virus that broke out in late 2002 in China and cost 774 lives.

Health officials are still unsure about exactly how the virus might spread, so the rapid rise in reported incidents has put airlines on high alert, rapidly tracking down the relatives of those may have been affected.

The Dow dropped 0.5% to 29196.04, while the S&P 500 fell 0.3% to 3320.79.

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