There's Still Nothing Even Close to Netflix
(Bloomberg Opinion) -- While investors weren’t pleased with the growth outlook Netflix Inc. gave Thursday, it’s still clear that the Covid-19 crisis is fortifying the company’s lead in streaming-TV entertainment. Other services that have been trying to build audiences in recent weeks and months — Disney+, HBO Max, Peacock, Quibi — are merely competing for second place.
Netflix reported second-quarter results after the market closed, with subscriber growth numbers the focal point once again, alongside a surprise management announcement: Ted Sarandos, 55, Netflix’s longtime overseer of content, was named co-CEO. “This change makes formal what was already informal— that Ted and I share the leadership of Netflix,” Reed Hastings, Netflix’s 59-year-old founder, wrote in his quarterly letter. It's true, they are seen as the joint leaders of Netflix, and this marks a sensible step in succession planning.
As for the numbers, Netflix added 10.1 million paying customers globally, more than the 8.3 million average analyst estimate compiled by Bloomberg. But many of those new users are people who would have joined Netflix down the road if it weren't for the virus, making the outlook for subsequent quarters less impressive, as Hastings warned in April. The company forecast just 2.5 million new subscribers for the third quarter, about half as many as analysts were predicting.
Analysts indeed set themselves up for disappointment, with Netflix’s share price dropping as much as 10% in after-hours trading. It’s still up 46% this year for one of the best returns in the S&P 500 Index. But even as the stock takes a deserved breather, it remains the unquestioned streaming leader and a must-have subscription in a market of mostly mediocre offerings. Meanwhile, normally blue-chip-quality companies such as Walt Disney Co. are struggling to find balance as their key profit centers get walloped by the pandemic and the Hollywood shutdown holds back their own streaming ambitions.
Disney, which relies on its theme parks, resorts, cruises and retail stores for nearly half its annual operating income, just reopened Disney World in Orlando last weekend after shutting down in March. Hong Kong Disneyland is closing again to comply with government mandates following an increase in coronavirus cases — emblematic of the challenge in operating a business that revolves around crowds and travel. Before Covid-19, it was the stability of such businesses that made Disney’s venture into the not-yet-profitable world of streaming feasible. Before Netflix reported earnings Thursday, its market capitalization had eclipsed that of Disney, as well as AT&T Inc., the parent of HBO, and Comcast Corp., the parent of NBC and Universal Studios.
While social distancing and stay-at-home orders have given Netflix’s competitors a chance to amass a following more quickly, subscribers are finding that once they binge-watch the top programs on these new apps — “The Mandalorian” in the case of Disney+ — there isn’t much else there. Part of the reason is that productions have been at a halt due to Covid. Netflix hasn’t been affected to the same degree because much of its planned new content for the year was already at or near completion, and so it will take longer for Netflix users to experience the programming drought. The service just added another new film last week that became an instant hit: “The Old Guard,” a sci-fi action flick starring Charlize Theron. (Hulu’s “Palm Springs” is also drawing much fanfare.) If Netflix’s library starts to look light later in the year, the company may need to pay up for more licensed content, but so far it’s had a steady stream. The company said that while it’s “slowly resuming productions in many parts of the world,” there’s still a lot of uncertainty due to the rising cases in the U.S. For that reason, it sees more new works becoming available on its service in the second half of 2021 than the first.
Google’s YouTube TV recently stunned consumers by raising its monthly fee 30% to $65, signaling that Netflix has room to raise its own standard $13-a-month subscription price. But with Netflix’s stock up as much as it is this year and investors still entirely focused on growth and not cash profits, it has no reason to increase fees just yet.
Other media giants can’t sustain the Netflix way of doing things. They may be forced to turn to price hikes and to embrace ads, which could turn off customers. And that right there is the Netflix moat. As ominous as its stock price looks, you can’t say the strategy isn’t working.
(Updates throughout with details from Netflix’s earnings.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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