Summary
- Mixed Picture: Netflix Revenue grew 3% YoY, slightly missing expectations, and the guidance also slightly missing expectations, with $8.5bn forecasted for the next quarter
- Paid Sharing: Password Crackdown strategy is largely working out
- Ad Tier: Revenue remains not material
- Subscriber Growth: 8% YoY, 238 million total
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This earnings report is the first one since Netflix began its account-sharing crackdown in the US. They introduced what they call “paid sharing” – you basically pay to add someone to your subscription. That strategy seems to be paying out for Netflix! “The cancel reaction was low,” the company told investors on Wednesday.
Revenue rose 3% year-over-year to $8.2 billion but slightly missed the forecasted $8.3 billion. The company gave guidance of $8.5 billion for the next quarter, missing expectations of $8.7 billion.In its shareholder letter, Netflix mentioned that “[b]uilding an ads business from scratch isn’t easy and we have lots of hard work ahead, but we’re confident that over time we can develop advertising into a multi-billion dollar incremental revenue stream.”
On the subscription front, Netflix managed to grow its paid subscribers by 5.9 million to 238 million in total. With that, the re-acceleration narrative remains largely intact.
Multiple Price Tiers
Netflix offers multiple price tiers for its product:
In doing so, they are making their services attractive to more people around the world. The Standard with ads plan remains interesting (although its contribution to revenue is still relatively muted). Depending on how this plan develops over time, it can prove to be a treasure trove for Netflix in the years to come. The company is focused on improving the advertising experience for both members and advertisers, with an aim to develop advertising into a multi-billion dollar incremental revenue stream over time.
Netflix has also been working on pricing and plans strategy for improved monetization. They have lowered prices in several less penetrated markets and phased out their Basic ads-free plan for new and rejoining members in Canada, the US, and the UK. Pricing strategies like these are generally known as 3 Degrees of Price Discrimination. It allows Netflix to cater to different segments of the market at the same time, with the potential to improve their revenue.
Content Creation
Variety and quality of content are key factors for Netflix members. Netflix aims to cater to a diverse set of tastes, cultures, and languages due to its international audience.
In Q2, Netflix offered a wide range of shows and films across different genres and cultures, all of which hit the Top 10 list in multiple countries, including non-English language titles in the US.
The company also successfully built lasting intellectual property (IP) and has more returning seasons than any other streamer. This year, they will have returning seasons of The Crown, Top Boy, The Upshaws, Sweet Magnolias, Heartstopper, Virgin River, Too Hot To Handle, and more.
The Bigger Picture
Netflix acknowledges that consumers have various entertainment choices, including movies, TV shows, sports, news, gaming, and social media, and therefore competition in the entertainment sector is intense. Major traditional entertainment competitors such as Disney, Comcast/NBCU, Paramount Global, and Warner Brothers Discovery now focus on profits to build sustainable, long-term streaming businesses.
Tech competitors like Apple, Amazon, and YouTube invest heavily to grow their streaming revenues. In 2022, Netflix’s revenue was $32B, while YouTube’s revenue across all its products was nearly $40B, and Amazon’s subscription revenue was $35B.
The success in the streaming sector requires strength in both entertainment and technology. This includes working with the best creators producing and licensing content across multiple genres and languages globally. Netflix aims to improve in all these areas to maintain its leadership in the streaming sector.
Our Take
The growth story of Netflix is still intact with this earnings report. The signs are there. This report also reveals the capital-intense business model Netflix has created over the years. It remains to be seen if Netflix can deliver and accelerate its growth again. We are also very interested in how the ads part of the business develops in the following years. Done correctly, it can generate a significant portion of the revenue in the future.
One very apparent risk is the competitive landscape. It puts immense pressure on continuous content creation. We may see some consolidation in the streaming business; who knows?
You can read more financial results like the one from BlackRock for example.
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