On April 19 of last year, Netflix had some problematic news for investors: A closely watched metric, paying subscribers, was falling for the first time in a decade. The overall 200,000-subscriber drop was less than 1% of the company’s customers, but with a second, much bigger drop expected in Q2, Wall Street reaction was swift and brutal.
Our Netflix Q1 2022 earnings story: Netflix Shares Crater Around 25% as Service Loses 200,000 Subscribers in Q1
Within days, shares plunged 57%, from $391.50 to as low as $167.54. In response, founder and Co-CEO Reed Hastings said the company would launch an ad-supported tier, and crack down on rampant password sharing. Other changes were coming too, including hundreds of layoffs, cancelled projects and deals, and moderated spending.
More importantly for everyone else, the Great Netflix Correction would force big changes on all of Netflix’s competitors that continue to reverberate. In a great irony, Netflix is the one most likely to benefit from all the changes of the past year.
Netflix’s fall had really begun months earlier, given the company’s own weak guidance for the quarter, shifting consumer habits two years into the pandemic, and Netflix’s withdrawal from Russia after the Ukraine invasion. Shares peaked in November, 2021 at nearly $678 apiece.
But Wall Street’s stubborn fixation on subscribers adds -- which it saw as evidence that massive deficit spending on programming would yield dominant market share in a big new business -- meant that a miss there was seen as disastrous.
True to Hastings’ word, Netflix delivered on that ad-supported tier, launching with Microsoft in November. Early evidence suggests the cheaper tier is attracting new customers rather than cannibalizing the cheapest ad-free tier. The password crackdown looms, already rolled out in three countries with more to come.
And some projects aren’t getting the blank check they once might have. For example, when writer-director Nancy Meyers (Somethings’s Got To Give, It’s Complicated) wanted to increase to $150 million the already gargantuan budget for her next Coastal Grandmother Style rom-com, Netflix finally said no, effectively killing the project.
Hastings also would edge off the middle of the screen, elevating COO Greg Peters to Co-CEO with Ted Sarandos and becoming executive chairman. After all that, Netflix shares are mostly back too. As of Friday, the price closed at $338.63.
Of course, for all the transformations that Netflix went through, it’s nothing like what hit everyone else.
All of a sudden, Wall Street seemed to realize that subscriber adds meant a lot less than churn rates and average revenue per subscriber. Massive deficit spending on shows didn’t make sense anymore, because ARPU and low churn meant more than market share.
It took a while for some to get the message. Disney’s Bob Chapek overpromised then was just over. The Disney board panicked after a Q3 earnings call featuring $1.5 billion in streaming losses and an oddly upbeat Chapek.
Bob Iger’s return brought a walk-back from Chapek’s wildly ambitious subscriber promises and much else: a reorganization, 7,000 layoffs, a re-emphasis on theatrical-first releases, and a revived willingness to license content to other companies.
The latter was particularly ironic. Iger is the one who said back in 2019 that he woke up one day realizing that selling Disney content to Netflix was akin to selling nuclear weapons to Third World countries. Rather than helping Netflix build its brand, Disney needed to grow its own service. The result, Disney+, had the best start of any of the newcomers, but remains locked in a certain lucrative but self-limiting corner of princesses and spandex.
At least now Disney’s market capitalization is bigger than Netflix again ($182 billion to $150 billion), though Disney does get about half its revenues from resorts, parks, cruise lines and other things Netflix doesn’t operate.
The transformations over at HBO Max have been even more wrenching, though it’s hard to blame that on the Netflix correction. The merger that launched the company 13 months ago saddled it with a staggering $55 billion in debt; repeated reorganizations, layoffs, project cancellations and spending cuts have improved the bottom line, if not morale or reputation.
And this past week, the company made its biggest bet yet, launching a mashup of HBO Max and Discovery Plus that will be graced with the anodyne new brand Max. New programming will look familiar to anyone who’s watched Warner Bros. the past 30 years; it’s chockablock with spinoffs, reboots, sequels, prequels (and probably not equals) of library highlights such as Harry Potter and Game of Thrones.
Paramount Plus has continued to add viewers at a good clip, and benefited from pairing the Taylor Sheridan Supernova (Yellowstone, 1923, Mayor of Kingstown, Tulsa King, 1883, et al) with Star Trek ad infinitum. But investors remain largely unimpressed, with a market capitalization still barely $14 billion. At least shares are up 39% from their October lows.
More generally, everyone has backed off the ruinous deficit spending on programming, and is promising to get to break even by next year. More likely, we’ll see more money spent on mergers and acquisitions in the next two years than on new shows.
There are still ridiculous paydays to be had, though in far fewer places than before. Matt Damon, Ben Affleck and their production team may have scored what was effectively a $40 million bonus from Amazon Prime on top of production costs for their Nike-Michael Jordan feature, Air. But the film generated only $30 million worldwide in its theatrical debut earlier this month, a notable flop by traditional standards that now is being positioned as building (very expensive) awareness of the movie for when it comes to streaming.
Meanwhile, Fleabag creator Phoebe Waller-Bridge may have scored a Best Comedy Series Emmy for Amazon in 2019, but she hasn’t delivered much since, despite a deal worth a reported $20 million a year. Scoring similar deals may be more difficult going forward, even at deep-pocketed Amazon, which is now busy mining that MGM motherlode it bought for $8.5 billion nearly two years ago.
But otherwise the business is a very different one from a year ago, when just about everything changed. One great irony stands out.
For, though Netflix indeed had to move off several long-cherished tenets, the Worldwide Leader also stands as the biggest beneficiary of everything that’s happened since its chastening.
Unlike its competitors, Netflix is already generating billions of dollars in cash flow, and has an ad tier that likely will only be additive to its bottom line. A crackdown on password sharing may send some annoyed people out the door, but it’s more likely to increase subscriber levels at least moderately from among the former freeloaders.
More importantly, just about all the competitors are making fewer shows. And just about all of them are now arms dealers, willing to license at least their non-tentpole series and features to others. Who’s likely to benefit from both trends? Netflix, which can license known, already popular projects from those suddenly less-ambitious competitors for less money than it might spend on lots of originals. That may be the greatest irony of all.
A final note: One happy outcome of the continued relevance of HBO’s current generation of franchises: Succession has given us a new concept, the Logan Roy Increment, i.e., the difference in value in a company between when its CEO is alive, and when, suddenly, the CEO is not.
Given health details in Vanity Fair’s much-discussed article about 92-year-old Rupert Murdoch, children Lachlan, James and Elizabeth may soon have their own opportunity to assess the metric. Whenever that true-life succession inevitably arrives, it will set off another round of change, as two notable family-owned media companies have to finally figure out their ultimate fate.
