Netflix earnings: Is the streamer’s pandemic party coming to an end?
Netflix will be in the spotlight after the bell this evening as it publishes its earnings for the third quarter.
The streaming giant has had a bumper 2020 so far as millions of people have turned to home entertainment during the coronavirus pandemic.
But as competition from rivals heats up and the impact of halted production begins to kick in, we ask analysts whether Netflix will be able to keep up the momentum.
Virus victor
It was all smiles at Netflix back in July when the company reported a huge 10.2m increase in subscribers over the second quarter.
The figures showed the California-based media platform was continuing to reap the rewards of lockdown measures as it enjoyed a 25 per cent rise in revenue to $6.1bn.
But the streamer added a word of caution to its quarterly report, warning investors that it expected subscriber growth to slow in the second half of the year as restrictions eased.
“Netflix’s streaming is a perfect lockdown service, and binge-watching went through the roof during April and May this year,” says Martin Garner, chief operating officer at CCS Insight.
“There is a concern that this could have been a one-off effect, with viewing activity settling back as people returned to work during June and July. However, it’s also possible that Netflix viewing has held up and broadcast TV has taken a bigger hit.”
Media analyst Paolo Pescatore agrees that “all eyes will be on subscribers and net additions”.
But he adds that the introduction of fresh lockdown measures in recent weeks could improve Netflix’s chances for the rest of the year.
“Encouragingly, the company is set to be free-cash-flow positive for the first time since its foray into streaming.”
Production problems
But while Netflix has been riding a wave of success during the coronavirus lockdown, its luck may be starting to wear off.
Film and TV productions around the world were forced to shut down as a result of the pandemic, leaving broadcasters and streaming firms with a dearth of new content.
While its pipeline of new content has kept it going up till now, the coming quarters could pose more of a challenge for Netflix.
“Netflix said in the second quarter that it had enough new programme material for the second half, but that it could see the schedule of new releases being thinner in the first half of 2021,” says Garner.
“But a key question is how well has Netflix been able to get back to a healthy production schedule across multiple countries to make sure viewers are not disenchanted early next year.”
Tom Johnson, chief transformation officer at Mindshare Worldwide, says tonight’s figures will show whether or not Netflix has had its “corona bump”.
“The next issue for Netflix is how to keep those new and existing subscribers happy when production of new shows is difficult and what happens if that becomes impossible due to second waves globally?”
Pressure on pricing
With 193m global subscribers, Netflix has established its position as the world’s leading streaming service.
But as rivals such as Amazon Prime, Disney Plus and Apple Plus pour billions of dollars into their own ventures, the streaming firm cannot afford to be complacent.
“With little or no releases going to the cinema right now for obvious reasons and rights owners beginning to play with over-the-top premieres – Mulan being an example on Disney Plus – having a strong slate of content will become vital to success, so you would expect Netflix to be investing in acquiring more content and funding more exclusives,” says Johnson.
Investing in more content would mean ramping up the war chest, so Netflix may be looking to hike its subscription prices.
“You cannot rule out further price rises, which have been consistent over the last few years,” says Pescatore.
But Dave Castell, general manager of inventory and partnerships at The Trade Desk, warns there is a “growing reluctance to spend big on streaming”.
“Our research earlier this year found that for one third of Brits, the max is just £10 a month,” he says.
“In many cases, this means subscribing to just one service – and Disney Plus and Amazon Prime are proving increasingly stiff competition to Netflix.”
At the same time, the firm appears to be shifting its strategy as its subscriber numbers reach saturation point and it looks to reduce churn.
The company has scrapped its free 30-day trial, replacing it instead with a ‘try before you buy’ policy allowing non-subscribers to watch selected films and series free of charge.
“This action is likely to be a way of future proofing from the inevitable churn increase that will happen once the other platforms are able to put out more new content to compete with Netflix’s expansive library,” says Mihir Haria-Shah, head of broadcast at Total Media.
“Despite launching this scheme in early September, signs suggest that they may have seen more success in driving ‘quality’ new subscribers (those that stay on for longer) from this model than they were with the 30-day trial.”