There was no “Mission Accomplished” banner in the background, but Reed Hastings Tuesday sounded like a man relieved he’d just survived an unplanned excursion into corporate hell. “Well, thank God we’re done with shrinking quarters,” Netflix founder’s and co-CEO told an analyst during the streaming giant’s earnings report earlier this week. “We’re back to the positivity.” Hastings’ huge grin and Norman Vincent Peale vibe may have been for the benefit of the stock price, but his message of cautious optimism wasn’t entirely unwarranted: After six months of declining membership numbers, Netflix added 2.4 million paid customers over the summer — more than double expectations. But while the panic phase of the streamer’s very bad year is probably over, it would be a mistake to assume everything is back to normal at Netflix.
For one thing, the positive third quarter numbers weren’t nearly enough to mend the rip in the streaming universe caused by Netflix’s six months of decline. A company whose entire business model was built around the premise of rapid growth is now living with the reality that simply making more and more of every kind of video entertainment— TV shows, movies, games — will no longer be enough to fuel the growth it had long said justified such a massive investment in content. Ending up 2.4 million paid members surely beats losing customers, but by Netflix’s own estimates, the company will be just shy of 228 million subscribers by the end of December, having added barely six million new members in 2022. That’s one-third of its 2021 pace (18 million) and a sliver of its pandemic-fueled 2020 growth (36 million). Nobody expected Netflix to expand forever, but serious analysts had been suggesting 300 million subscribers by 2023 was a very attainable goal— a narrative company execs did nothing to discourage since it kept pushing its stock price higher and higher.
Of course, Netflix still has more customers than any other subscription platform, and its premium price means it’s pulling in more overall revenue from streaming than its biggest rivals, too. But the company also spends $17 billion a year on content, churning out dramatically more titles than its peers. How big is the gap? Wall Street analysts MoffettNathanson earlier this month issued a report showing Netflix released a jaw-dropping 1,026 episodes of television just during the third quarter of 2022 — nearly double the combined output of Amazon’s Prime Video (223), Hulu (194), and HBO Max (114) over the same three months. Netflix co-CEO Ted Sarandos has long touted a “virtuous cycle” in which more content begat more growth, in turn justifying more content. But while the Netflix binge factory hasn’t slowed down, the growth has. And that’s why company execs have now started executing what might be called The Big Pivot.
After years of worshiping at the altar of growth, the high priests of Netflix are now preaching a new gospel of the bottom line. “We are increasingly focused on revenue as our primary metric,” the company wrote in its latest letter to shareholders. In other words, Netflix wants investors and the larger entertainment industry to pay less attention to how many new members it’s signing up and instead focus on how much more money it’s making every quarter. Obviously, Netflix has a vested interest in downplaying subscriber growth now that said growth has stalled: Numbers which once regularly wowed Wall Street are now much less exciting. Some of this is about spin, which is why starting next year the company will stop its practice of forecasting how many new subscribers it expects to add (or lose) in the next quarter.
But there’s also legit logic behind The Big Pivot. Netflix is about to do two things which, theoretically, should bring in a lot more cash: Launch an ad-supported tier and get tough on folks who share their passwords with friends and family. In this new environment, someone who now pays $15.50 per month for the service may soon agree to shell out $23.50 per month so her daughter at college and grandparents in another state can still share her account. Or a subscriber who had been paying $10 per for Netflix’s basic tier could decide to save another three bucks every month and downgrade to the ad-supported tier— a move which could lower revenue but might also yield Netflix more money if its ad sales are strong enough. Bottom line: While Netflix’s revenues up until now have mostly been a function of how many subscribers it claimed, that formula is about to get a lot more complicated. How we judge the company’s performance ought to get more nuanced as well.
Plus, as Hastings alluded to during Tuesday’s investor interview, we also are entering a new epoch of the streaming era which kicked off a decade ago with the debut of House of Cards. Netflix in particular is no longer a sexy upstart that can get by on its youthful energy and charm. And while rivals such as Disney+ and HBO Max have far more room to grow than Netflix does right now, particularly outside of North America, all the major streamers are now well past their launch phases. This is why Netflix is now arguing streamers should be judged not by their potential but by actual results, both in terms of profit and programming. “We’re pretty excited about this next phase, which is competitive excellence,” Hastings said. “If we execute down that path, we’ll win.” Maybe — but getting those victories is going to be harder than ever for Netflix.
Ted Strikes Back
Netflix’s U-turn on advertising earlier this year was breathtaking: Company execs evolved from a decade of En Vogue-level rejection of the idea to full-on Marvin Gaye embrace faster than soon-to-be former UK prime minister Liz Truss assumed (and then lost) power. The company’s willingness to so completely reverse course has prompted waves of speculation in recent months that other pillars of Netflix philosophy might be next to fall. But the streamer this week had a pretty blunt message for anyone expecting more radical changes: Curb your enthusiasm.
➽ Lots of anonymous industry sources over the years have argued Netflix was making a mistake by adhering to the binge release model it pioneered, and the streamer’s recent woes have only encouraged those naysayers to speak up even more loudly. A report in Puck last month even claimed Hastings was “now willing to make the switch if necessary,” suggesting the binge would soon go the way of Qwikster. But Tuesday the streamer went out of its way to (again) throw cold water on such rumors, weaving a strong defense of the binge into its shareholder letter. “We think our bingeable release model helps drive substantial engagement, especially for newer titles,” the company wrote, having clearly read Buffering last year. “It’s hard to imagine, for example, how a Korean title like Squid Game would have become a megahit globally without the momentum that came from people being able to binge it. We believe the ability for our members to immerse themselves in a story from start to finish increases their enjoyment but also their likelihood to tell their friends, which then means more people watch, join and stay with Netflix.”
➽ The nagging perception that Netflix feature films just don’t have the same impact as those released in theaters, despite boasting similar budgets, has long been a core tenet of the argument that the streamer needs to figure out a way to give its movies wide theatrical releases. And in May, Bloomberg reported Netflix was maybe close to doing just that and was talking to theater chains about testing a 45-day theatrical window for a few of its 2022 releases. But on the earnings interview, Sarandos once again scoffed at the idea that the streamer needs to change its film strategy. “We’re in the business of entertaining our members with Netflix movies on Netflix,” he said. “So that’s where we focus all of our energy and most of our spend…..There’s all kinds of debates all the time back and forth, but there is no question internally that we make our movies for our members, and we really want them to watch them on Netflix.”
Sarandos also sought to clarify that next month’s one-week theatrical preview of Glass Onion: A Knives Out Mystery is not, as some have suggested, a shift in philosophy or even some sort of olive branch to theater owners. Instead, he said the stunt is designed to promote its Netflix debut, not unlike when movies play at film festivals such as Venice or Toronto. “This one-week release on 600 screens is a way of creating access to the film and building buzz, the same thing we’re doing in those festivals,” he said. “So I would look at this as just another way to build anticipation for the film and build buzz and reputation for the film ahead of its Netflix release.” (That said, if the one-week theatrical engagement for Glass Onion proves to be a box office smash, it wouldn’t shock me if Netflix simply decided to extend the theatrical run for another week or two.)
Despite critics who continue to insist the company needs to adapt more to traditional Hollywood ways, I actually think the last thing Netflix needs to do is remake itself in the image of its younger rivals. Accepting advertising can perhaps be seen as a necessary evil, but forcing people to tune in every week for new episodes of all of their favorite shows, or making them wait six weeks to watch Netflix’s biggest movies, would only make the service feel even less special than it already does today. In the short term, it makes more sense to keep changes to a minimum. Why abandon more core tenets than necessary before knowing whether adopting ads and putting the squeeze on password-sharers will be enough to make up for the slowdown in subscribers?
That said, if there’s one lesson to be learned from the last six months, it’s that nothing at Netflix is truly set in stone. Three years ago, the company used a letter to shareholders to offer a very specific rebuttal to rumors going around about a change in philosophy at the streamer. “When you read speculation that we are moving into selling advertising, be confident that this is false,” it told investors. “We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.” I have no reason to doubt Netflix execs were anything but sincere when they wrote those words in 2019, and there’s no evidence to suggest they didn’t mean what they said this week about the binge model and theatrical releases. But if a year or two from now the new ad and password-sharing initiatives end up being less successful than Netflix execs hope, there will once again be enormous pressure on those suits to shift gears. If the situation warrants, today’s dogmatic defenders of the Netflix way will, once again, quickly turn into pragmatists.
