Netflix faces a backward future in which traffic is no guarantee of growth

Netflix seems to have had a wind after entering the final quarter of 2021, with Korean drama incest Squid fishing game attracts millions of viewers and 150 ready-to-release original shows, including Don’t look up, which stars Leonardo DiCaprio and Jennifer Lawrence.

It’s “the most powerful content medium ever,” the company says.

But the star-studded new releases weren’t enough to help Netflix significantly increase its subscriber base in the fourth quarter. The video streaming pioneer said on Thursday that 8.3 million new subscribers signed up for the service in the fourth quarter, the lowest number it added in the period since 2017.

Worse yet, it forecasts that it will only add 2.5 million subscribers in the current quarter — down from last year’s 4 million and well below first-quarter performance in each of the past five years. Investors dumped the stock on Friday, sending the stock down nearly 22% to $397.69. They have dropped more than 40% since the peak of Squid fishing game mania in November.

In addition to the weak leadership, the company’s performance has raised bigger questions about its business model. Among them: what if popular new shows aren’t enough to attract many new subscribers to Netflix?

Squid fishing game released a week ago [the fourth quarter] Laura Martin, an analyst at Needham & Co, who has a sell rating on the stock. “Content is no longer a competitive advantage,” especially with traditional media groups investing heavily in their own streaming services.

According to estimates by Morgan Stanley this year, Netflix is ​​expected to spend $18 billion on content as it looks to maintain its lead over rivals including Disney Plus, AT&T’s HBO Max, Apple TV and Apple TV. Plus, Amazon Prime, ViacomCBS’ Paramount Plus and others. The FT has estimated that eight US media companies will spend $140 billion on content this year as the streaming wars intensify and analysts expect double-digit spending in the coming year. the next few years.

Investors seem to recognize the high costs of the streaming business – and the often short shelf life of content on the service. Following the Netflix report, analysts at MoffettNathanson noted that the “decay rate” of streaming content is “incredibly fast,” especially since popular programming can be done in just one hour. night.

This means that “streamers must continuously spend on new content to attract and retain new members, with any drop in that spending leading to a mild quarter.” more” for subscriber growth, the company said in a research note.

“We question whether streaming is a good business,” said Michael Nathanson, an analyst at the company. “It requires a lot of new content.”

Netflix said its higher content spending compressed its operating margin to 8% in the fourth quarter, down 6 percentage points from a year earlier. A significant profit boost will mean less spending on content, which many consider unlikely given the intensity of competition in the streaming market.

Netflix increased the price in the US this month to $15.50 per month from $14 – premium to $8 per month charged by Disney Plus. Netflix officials highlighted last week that subscriber rates fell in the fourth quarter, and they say their plan to break even and become positive free cash flow this year is on track.

Netflix, Disney, and other streaming companies posted massive subscriber gains during the 2020 shutdown, but the return to more normal routines has slowed growth.

The company blamed the disappointing subscriber growth rate in part on “macroeconomic difficulties in some parts of the world,” particularly Latin America. It said competition “could affect our marginal growth”, a rare admission that it is facing pressure from other streaming services. But it added that it continues to grow in every country its rivals have launched in.

Reed Hastings, Netflix chief executive officer, said it was difficult to pinpoint the cause of the slowdown because “Covid has made so much noise”.

But Martin said Netflix underestimated the impact that increased competition is having on its subscription growth. “Part of the problem is that Netflix doesn’t think they have a problem,” she said. “I’ve come to the conclusion that competition is real, but they haven’t come to that conclusion yet.”

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

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

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

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