Netflix Will Be Sticking to Its Script
Streaming leader unlikely to dabble in advertising or staggered releases to address subscriber growth slowdown
By Dan Gallagher
Wall Street Journal
Heard on the Street
March 17, 2022 7:03 am ET
As Netflix NFLX 3.88% prepares to launch the next season of one of its biggest shows ever, investors shouldn’t be expecting the streaming leader to start cribbing pages from its rivals’ scripts.
The second season of “Bridgerton” will be released next weekend. The first season from late 2020 still ranks as the company’s most popular English-language TV series ever in terms of hours viewed in the first 28 days. But the latest release comes as Netflix faces a much tougher audience on Wall Street concerned about the company’s ability to keep growing its subscriber base at the rate to which investors have become accustomed. Despite a strong run over the past two days, Netflix shares have still lost nearly half their value from the stock’s peak in mid-November and are down 41% for the year—the worst performance in the S&P 500 Media & Entertainment Group.
A drop that severe has naturally given rise to speculation about what new approaches Netflix could take to rejuvenate paid subscriber growth, which averaged 24% annually from 2016-2020 but managed only 9% last year. The most common rumor has Netflix launching an advertising-supported tier. The company has long denied interest in such an offering, but Chief Financial Officer Spencer Neumann told a Morgan Stanley investment conference last week that “it’s not like we have religion against advertising,” adding “never say never.” Those comments came just a few days after chief streaming rival Disney DIS 0.96% announced its own plans to launch an ad-supported tier later this year. HBO Max, Peacock and Paramount+ all do so already.
Mr. Neumann also made clear at the event that advertising is “not something that’s in our plans right now.” And while Netflix may not have a religion against it, advertising has long been dismissed by founder and co-Chief Executive Officer Reed Hastings as a business option. In a quarterly call in early 2020, he noted that online advertising is dominated by Google, Facebook and Amazon AMZN 2.70% —much bigger companies that garner deep levels of consumer data to target ads effectively. “To keep up with those giants, you’ve got to spend very heavily on that and track locations and all kinds of other things that we’re not interested in doing,” Mr. Hastings said.
Another option Netflix could consider would be to adopt a more staggered release practice for its TV shows. All eight episodes of the new “Bridgerton” season will be available at the same time, following a long-established preference by Netflix for binge-worthy content dumps. But that now stands in contrast to other streamers that tend to release their new TV shows episodically. More than 70% of all TV shows released so far by Disney, Apple TV+ and Paramount+ have followed a staggered release schedule, while HBO Max releases more than half its TV shows in such a manner, according to Ampere Analysis.
The practice allows streamers with slimmer catalogs of original content to mitigate the risk of subscribers jumping onto the service and then canceling after watching their favorite program. But even Netflix—with its now-deep library of original movies and shows—could face the risk of increased subscriber churn. Competition has grown significantly over the past two years and most of it is priced well below Netflix.
Netflix might also be getting less bang for its content buck lately. Justin Patterson of KeyBanc Capital Markets estimates the service averaged about 2.2 viewing hours per subscriber for its two most recent hit series—“Inventing Anna” and the second season of “The Witcher”—compared with a median of 3.8 viewing hours per sub for popular shows before the pandemic.
Netflix has dabbled in staggered releases, such as with a few of its reality shows. And the next season of the blockbuster hit “Stranger Things” will come in two parts starting in May due to what its creators described as a total run time nearly double the length of previous seasons. But it is unlikely to ever move fully away from the binge model it pioneered; co-CEO Ted Sarandos told investors in an April 2020 call that “customers have spoken loud and clear that they really like the options of the all-at-once model for us.”
That will leave Netflix investors to focus on more traditional measures, such as revenue and profitability. Revenue growth is indeed expected to outpace subscriber growth over the next three years, according to FactSet estimates. Michael Pachter of Wedbush, who upgraded Netflix to a neutral rating last week after rating the stock as a sell for more than a decade on valuation, noted that the company’s first-mover advantage and large subscriber base provide Netflix “a nearly insurmountable competitive advantage over its streaming peers.” At the very least, no other streamers will convince millions of Anglophiles to clear their calendars next weekend.
Write to Dan Gallagher at dan.gallagher@wsj.com
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Appeared in the March 18, 2022, print edition as 'Netflix Is Sticking to Its Script.'
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