Netflix Inc.’s second consecutive ruinous quarterly forecast pummeled the stock this week — $50 billion in market capitalization disappeared in one day alone — and also made Wall Street wonder if streaming services are a good investment in general.
Streaming services have enjoyed a boom in recent years on the heels of massive growth from Netflix
which basically invented the category and saw only Amazon.com Inc.
follow at first. Now, however, there are new competitors from legacy media companies and other giants, including Walt Disney Co.
Warner Bros. Discovery Inc.
and Comcast Corp.
Wall Street was excited about the possibility of new revenue streams from big and small names alike, especially after the COVID-19 pandemic led to huge subscriber gains from consumers who were forced to shelter in place and desperate for entertainment options. However, after Netflix’s recent stumbles and other high-profile disappointments — from Quibi Inc. lasting less than a year to Warner Bros. Discovery canceling CNN+ in less than a month — the street isn’t so sure.
“We believe investors are now questioning the long-term market potential in streaming,” BofA Global Research analyst Jessica Reif Ehrlich said in a note Wednesday.
Rich Greenfield of Lightshed Partners also weighed in on subscription video-on-demand, or SVOD, in a Thursday note: “With [a total addressable market of 500 million to 1 billion subscribers globally] in question, increasing competition from tech giants (Apple and Amazon) who do not care about the short-term profits of SVOD and the need to constantly retain users with must-see programming (which is hard to create 365 days a year), it is becoming clear that the profitability of SVOD may not be nearly as compelling as investors hoped and certainly nowhere near as profitable as the legacy businesses that streaming is replacing.”
Netflix is the most prominent example of growing distrust, a streaming pioneer that won fans through years of frenetic growth but has seen its market cap fall from more than $300 billion at its pandemic peak to less than $100 billion at times this week. The company avoided an advertising-supported model and let slide millions of shared accounts as it grew, but economic, social and geopolitical factors combined to undercut its dominance in recent months and led executives to announce major changes.
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“It’s a case of saturation [with people watching more streaming content on multiple services] and balkanization [Netflix producers are peeling off and creating content of their own],” Aram Sinnreich, media professor at American University, told MarketWatch.
The streaming market’s challenge is both Netflix-specific and industrywide, said Paul Erickson, research director for entertainment at Parks Associates. Netflix’s loss of 700,000 users in Russia as it shut operations there due to the invasion of Ukraine underscores its status as the largest, most-established service overseas.
More generally, a slowdown in subscription growth is bedeviling an industry beset by cost-cutting consumers dealing with inflation and a post-COVID bounce that has waned. Netflix, Disney and others benefited from a surge in homebound streaming use that has tapered, he said.
“Consumers are more discretionary in their spending, which would help Disney, which is more hedged by the Disney bundle,” Erickson said.
Forrester in December found 43% percent of U.S. adults who use a streaming service are “concerned with how much they’re paying for all of the streaming services they subscribe to.” Nearly half (44%) are open to cheaper, ad-driven streaming options.
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“What caught up with [Netflix]? You can’t keep growing forever and inflation has reared its ugly head,” Samuel Craig, professor of marketing emeritus at New York University’s Stern School of Business. “Consumers are re-evaluating what they are spending on entertainment, gas, groceries. It’s pretty easy to drop one or two streaming services if you are subscribing to five or six. Investors are quick to drop out when there is a hiccup.”
Consumers are voting for ad-supported services with their click finger, and they have an abundance of content to choose from, Mark Vena, principal analyst at SmartTech Research, told MarketWatch. Netflix must also contend with specialized content from Disney (which is more family-oriented) and Apple (focused on prestige projects) while maintaining its “everything for everybody” approach, he added.
“Netflix raising prices has not helped,” Vena said. “It may have a ‘come to Jesus moment’ for spending so much money on content ($17 billion this year).”
Netflix raised prices in the U.S. and Canada in January, its third hike in the past three years, while it continued to spend heavily on content. The result is a service that can seem pricey when compared with newer rivals that are willing to charge a lower price to attract subscribers, as Netflix did in earlier stages.
“Consumers today have many more choices when it comes to quality programming on streaming platforms,” Forrester analyst Mike Proulx says. “But they also have a finite amount of time and money to spend on them. Ultimately consumers will follow the content and the overall value they’re getting when choosing which streaming services make their watch list.”
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Morgan Stanley analyst Benjamin Swinburne refers to the “crowded house” approach of U.S. households: On average, they subscribe to 2.8 paid services, compared with 2.5 a year ago. The average Netflix user increased to 4.1 total subscriptions, while Disney Plus and HBO Max users reported more than five each.
“In other words, no streaming service appears to have the consumer to themselves,” Swinburne said in a note Thursday.
The consumer response may be to continually cycle through streaming services, signing on for small bursts of time to binge new content before canceling and joining a new service for the same purpose. This practice is called “churn” in the industry, and 25% of U.S. customers have adopted a “churn and return” philosophy of canceling a streaming service only to circle back and re-subscribe to it within a year, according to Deloitte.
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The churn rate is only intensifying as services raise prices or a favorite show concludes. The average churn rate in the U.S. across all paid streaming video-on-demand services remains at 37%, and climbs to 50% for millennials, according to Deloitte.
“We have had an arms race of original content, and subscribers have chased it,” Kevin Westcott, vice chairman of Deloitte, told MarketWatch. “The shift that we need is more content, as well as content discovery, music and games.”
While questions linger about the future of streaming, the situation at Netflix isn’t nearly as dire as Wall Street’s reaction would indicate, argues Dan Rayburn, an independent streaming analyst.
“Netflix’s revenue increased 10% and its numbers improved in [Asia-Pacific], yet Wall Street was stuck on its subscriptions,” Rayburn said. “Netflix should stop reporting those, as Apple stopped reporting iPhone unit shipments.”
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The independent analyst contends Netflix is already addressing issues by expanding into gaming and embracing the idea of accepting ads and cracking down on shared accounts, which Netflix executives estimated Wednesday allows 100 million households to view their content for free. The company could generate $3 billion in annual revenue if it were to convert just 25% of the 100 million households not paying for the service, at $10 a month, Rayburn noted.