Shulou(Shulou.com)11/24 Report--

After the first user loss and a sharp plunge in share prices, it seems that streaming giant Netflix has finally come out of the dark phase of the first half of this year and ushered in user growth again. After coming out of the trough, Netflix is quietly transforming its focus: from user growth to revenue growth, changing ideas to embrace advertising, and achieving revenue diversification.

Photo note: Netflix is now more focused on revenue and profitability to end the loss of users. Netflix's results released on Tuesday undoubtedly excited investors. Netflx revenue for the quarter rose 5.9% from a year earlier to $7.926 billion, above market expectations of $7.85 billion. Net profit for the quarter fell 3.5% from a year earlier to $1.398 billion, but also higher than market expectations. The two core financial indicators are higher than market expectations.

However, what investors are most concerned about is not financial indicators, but net subscriptions to user data. Netflix posted a net increase of 2.41 million users worldwide in the third quarter, almost two and a half times as many as previously expected. In July, Netflix expected a net increase of 1 million users in the third quarter, compared with Wall Street's previous estimate of 1.09 million.

In addition, Netflix also gave an optimistic forecast for user growth in the fourth quarter, predicting a net increase of 4.5 million users in the current quarter, exceeding the market expectation of 4 million. Netflix believes that low-cost packages with ads and a crackdown on users' shared accounts will bring more subscribers to the company.

By the end of the third quarter, Netflix had more than 223 million global users, up 4.5 per cent from a year earlier. And each market achieved net user growth in the quarter. Among them, there are 1.43 million new users in the Asia-Pacific region, which has once again become the growth driver of Netflix. It is worth mentioning that even the most lost market in the United States and Canada returned to growth, with a net increase of 100000 users in the quarter.

Netflix shares soared 14% immediately after Tuesday's trading, spurred by positive results. After hitting a trough of $162in July, Netflix shares have steadily recovered to their current level of $270in the past three months, but are still a far cry from the all-time high of $700at the end of last year and where they were three or four years ago.

The more important significance of this financial report is that Netflix finally put an end to the loss of users in the first half of 2022. Netflix founder and co-CEO Hastings (Reed Hastings) said after the release of the results, "after a challenging first half, we believe Netflix is on the road to re-accelerating growth."

Netflix attributed the renewed user growth in the third quarter to the launch of several blockbuster new shows, including "Strange things 4" and "Monster: the Story of Jeffrey Damo." In fact, the turnaround in Netflix's business has been evident since the second quarter. The loss of users in the quarter has improved significantly, with 1 million users only half of what had been expected (2 million), and growth is expected to return in the third quarter.

(note: Netflix price increases over the years and global user growth map) share prices plummeted and forced to lay off workers in the past two years, it was a dark time for the global COVID-19 epidemic, but Netflix ushered in the best time, with cumulative user growth of more than 60 million in the past two years, and the total number of global subscribers exceeded 200m. Driven by strong growth in the user base, Netflix shares have also soared, becoming the most eye-catching "epidemic stock" in the past two years, with a market capitalization of more than $350 billion at one point.

But this rapid growth suddenly slammed on the brakes after entering 2022. In the first two quarters of this year, the number of Netflix subscribers fell by 200,000 and 1 million, respectively. This is the first time that Netflix has lost users since it launched its streaming service in 2007.

In terms of content output, Netflix has done a good job over the past year. They have won 27 nominations for this year's Oscars, leading many Hollywood studios for the third year in a row. Netflix's "Squid Game" not only set a new high in audience ratings, but also won the best director and best actor awards at this year's Emmy Awards. At least eight of the top 10 TV dramas on US streaming platforms are from Netflix.

Why is there a loss of Netflix users? At the time, the company's two co-CEO blamed several major reasons for the problems: slowing growth of smart TVs, user-shared accounts, increased competition in the streaming market, inflation and withdrawal from the Russian market (losing 700000 users).

Users sharing account passwords is also a headache for Netflix. Netflix estimates that at least 100 million people worldwide log in with existing user accounts, including 30 million in the United States and Canada alone, causing the platform to lose nearly $9 billion a year. To plug this loophole, Netflix began experimenting with the policy of requiring users to pay extra to share accounts in several Latin American markets in the first quarter of this year, and plans to fully implement it next year.

Although Netflix believes that the loss of users is short-lived, the market shows a panic sell-off. On April 19, just after the first-quarter results were announced, Netflix's shares tumbled 35%, wiping $50 billion off its market capitalization in one day. Just a month later, Neftlix shares fell below $200, down 70% from the all-time high set at the end of last year.

There is a loss of users on the one hand and a decline in the stock market on the other. Since the end of April, the Federal Reserve has launched a series of historic interest rate hikes to combat 40-year high inflation. Netflix became the technology stock that fell the worst among the big swings in the US stock market. It not only gave up all the gains during the epidemic, but also fell back to the share price level of 2018.

The collapse in share prices has dealt a heavy blow to the morale of Netflix employees because it is directly related to the stock options part of their pay. Although Netflix executives thought the market was overreacting, they also had to make a series of internal adjustments to control costs. Netflix cut hundreds of jobs in the second quarter, cut staff in its animation department and rented some office space. This was unthinkable in the previous period of rapid growth.

Just before the results were announced, Netflix also announced the long-anticipated launch of a basic package with ads starting next month, which costs $6.99 a month, $3 less than the current minimum package of $9.99. This is the first time that Netflix has accepted advertising since it launched its streaming business, and it also means a major business model transformation for Netflix. And Netflix will be a direct competitor to Google's YouTube.

Users who choose the $6.99 advertising package will see 4-5 minutes of ads every hour, and the ads will be inserted before and during the video. But surprisingly, Netflix's advertising technology partners chose Microsoft, which doesn't have much presence in online advertising, over the industry giant Google.

Hastings, the founder of Netflix, is known to hate advertising because it destroys the user experience, which is the main reason Netflix has refused to launch a package with ads. As long as you buy a package, all the wonderful content will be presented at once, without advertising interruptions, this is the secret of Netflix's success. Even for trump-card TV series like House of Cards, Netflix is not stingy in presenting them at one time, never using such tricks as allocating or ordering ahead of time.

Netflix has resisted advertising for the past 15 years, and Hastings was unimpressed even when other streaming platforms launched low-cost or even free packages with ads. Perhaps Hastings doesn't want his company to compete with Google and Facebook in the advertising market, where he was previously a board member of the two Internet advertising giants.

Hastings believes that users who buy a package don't like to see ads. When Netflix launched its streaming service, the world was still in the era of cable TV, with users not only paying for cable TV, but also watching ads for up to 15 minutes per hour on average. Hastings' marketing positioning for Netflix is, "it's all in Netflix, no advertising." As recently as January 2020, Hastings publicly told analysts that one of the reasons users chose Netlix over cable was that there was no advertising. He stressed at the time that Netflix would be more focused on attracting more users.

However, Netflix soon found that the market was becoming more and more competitive. In 2019 and 2020 alone, powerful competitors such as Disney+, HBO Max and Paramount + entered the market. Not only do they have rich content resources, they are also cheaper than Netflix, and they even have free packages to watch advertisements. Perhaps the Netflix also felt threatened by the market at that time, but the arrival of the COVID-19 epidemic changed the spring tide of the streaming media industry and let Netflix down his guard. In the past two years, various streaming platforms have been growing rapidly, and Netflix has added more than 60 million users.

Netflix believes in the user stickiness of his platform. According to Antenna, a market research firm, Netflix's previous user turnover rate was only 2%, half the average of the streaming industry. It is out of confidence in the stickiness of users that Netflix raises its price every 18 months. Over the past nine years, the price of Netflix's basic package has risen from $7.99 to $15.49, and has risen three times in a row in the past three years, from $12.99 before the outbreak to $15.49. Perhaps Netflix overestimated the loyalty of its users and their willingness to accept price increases.

The situation began to change as early as the end of 2021. Antenna survey data show that more than 20% of Netflix's new subscribers in the United States will cancel their subscriptions in a month's time, a turnover rate that shows that Netflix is not much different from other streaming platforms and faces brutal price comparison and content competition.

It was not until the first quarter of this year that Netflix management felt the crisis. When Netflix held its annual meeting at the Hilton Hotel in Anaheim, Calif., on March 16, many senior executives felt the problem for the first time: while showing strong growth over the past year, CEO and CFO euphemistically revealed the current stagnation.

In the same month, when asked about advertising at an investor conference, Netflix CFO Newman said intriguingly, "never say never." As Netflix's share price plummeted a month later due to the loss of users, Hastings, the most resistant to advertising, finally changed his mind and announced plans to launch an advertising business in the next year or two.

(note: the focus of "out of the sheath 2," which is a hit in North American cinemas, has shifted to revenue growth. However, just after Netflix's net added subscribers returned to growth, the company wants the market to focus less on indicators of user growth and more on profitability and sustainability. It seems that the pioneers and leaders of the streaming industry now value revenue more than their competitors.

Netflix said after the release of the results that it will no longer provide expectations for net user growth from next year, but will continue to provide regular performance forecasts such as revenue and profit. "We are increasingly focusing on revenue as the primary indicator," Netflix wrote. "as we develop new revenue models such as advertising and paid sharing, this will become more important in 2023."

In addition, Netflix also plans to expand its game business, plans to add 55 games to the current 35 games, and expand its game business revenue through in-app purchases and advertising.

Netflix remains the leader in the streaming industry, launching 700,800 pieces of content a year, with more than 223 million global users. In key US and Canadian markets, Netflix has 73.39 million people, accounting for 8% of US TV ratings, far surpassing competitors such as Disney, HBO and Paramount.

Netflix executives still believe that there is room for future user growth and believe that the subscription user base can reach at least 500 million. Even in the United States, where streaming media platforms are popular, the market share of cable TV relative to streaming media is still as high as 65%, which means that streaming media still has a lot of room for growth.

Netflix co-CEO Sarados (Ted Sarandos) reiterated after the earnings release that the company plans to spend $17 billion on content production this year, but is also working to achieve a higher return on expenses. Netflix is ahead of its competitors in finding ways to create content and make money. There will be a major transformation in the streaming industry as competitors stop investing and focus on profitability.

"it is difficult to build a large-scale and profitable streaming business, and we expect all other competitors to lose money on the streaming business," he said. "this year, the operating loss of the entire streaming industry will exceed $10 billion, while Netflix will be able to achieve an operating profit of $5 billion to $6 billion."

A bigger shift may lie ahead, with Netflix considering synchronizing its content for offline theaters, according to an internal memo in June. This will not only bring huge box office revenue to Netflix, but also attract more cinema audiences to turn to online platforms. This is also an important strategy that HBO Max used to attract new users. The suspense blockbuster "Blade out of the sheath 2", which is currently a hit in American cinemas, is produced by Netflix.

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