Netflix Strikes Back with the Addition of 2.41 Million Users in Q3

Subscriber Growth

Netflix had a very bad first half of the year, since it lost 1,170,000 subscribers during that period, partly due to increased competition, relinquishing users for the first time in more than ten years.

The firm however staged an impressive turnaround during the third quarter, since it added 2.41 million users, easily covering previous losses and surpassing its own projection for around 1 million new users. The Asia-Pacific region was the main contributor with nearly 1.5 million new users, while only 100,000 subscribers were added in the key US-Canada area. ^[1]

This reversal came on the back of popular original content, such as the penultimate season of "Stranger Things", which generated 1.35 billion hours viewed and star-studded action movie "The Grey Man" with 254 million hours viewed.

Furthermore, it expects bigger subscriber growth ahead, since it projects 4.5 million new paid memberships in the fourth quarter, but will stop providing such guidance, starting with the next earnings report in January.

During the earning call, Co-CEO Reed Hastings said that "we're done with shrinking quarters", but CFO Spence Neumann cautioned that they are "still not growing as fast" as they would like. ^[2]

Ad-Supported Subscription

After the dismal first-half and the massive subscriber losses, Netflix reacted with changes to key aspect of its strategy, mostly regarding the introduction of a lower-priced subscription plan that would include advertisements. I have long maintained that this may be the way forward for the streaming industry, amidst increasing competition and high inflation, which reduces disposable income.

The streaming giant had announced its intention to offer an ad-supported tier around six months ago and expected this offering to launch early next year. However, it was able to move swiftly and the "Basic with Ads" plan will be introduced on November 3 in twelve countries, priced at $6.99/month in the US. ^[3]

This undercuts Disney's offering in both timing and pricing, as the entertainment giant will begin offering an ad-supported tier in early December in the US, before expanding to more regions. Furthermore, the new plan will cost $7.99 for Disney+, a full dollar higher than Netflix's offering, while the bundle along with Hulu and ESPN+ will be priced at $12.99. ^[4]

Password Sharing

The streaming giant has been tolerant towards password sharing for a long time, perhaps acknowledging a positive impact on its popularity during the early years, but has recently identified this as a reason for slowing growth. As such, it has been trying various approaches to monetize it, with Latin America being the testing ground.

In this effort, it had created the "add extra member" feature back in March and also launched the "add a home" functionality later in the year. The latter however, will wind-down as the company now shifts to the "Profile Transfer" option. ^[5]

This latest feature was announced earlier this week and has already started rolling out around the world. It allows users of another person's account, to transfer their personalized viewing history, lists and other settings, when they start their own paid membership. ^[6]

Top & Bottom Line

Tuesday's financial results for the third quarter of the year, showed the generation of $7.926 billion in Revenues, which beat the firms projection and constituted a 5.9% growth year over-year, driven by the increased is paid memberships. However, it was lower than the Q2 figures, which Netflix officials attributed to an adverse foreign exchange impact.

Netflix has decided to shift its focus to Revenues, as the primary line metric, as it develops new revenue streams, like the aforementioned ad-supported subscription and paid sharing. It expects this to become more important next year and forecasts lower revenue of $7.776 billion in Q4, as the new advertising business won't have a material pact in that quarter.

Its bottom line was rather underwhelming, since Net Income dropped to 1.398 billion in Q3, marking a decline on both quarterly and yearly basis.

Competition

Competition has been increasing as legacy entertainment companies and tech giants enter the streaming arena, with strong offerings. Disney's Hulu, ESPN+ and Disney+ platforms had surpassed Netflix is terms of subscribers as of July and it will be interesting to see if it will be able to maintain the lead. ^[7]

Netflix has been investing heavily in creating to cater to every customer, but entertainment giants such as Disney, HBO/HBO Max have decades worth of content, while direct to consumer services from the Amazon.com and Apple also boast impressive progress.

HBO/HBO Max dominated this year's Emmys with 38 awards, leaving Netflix in the second place with 26. Disney+ and Hulu got 12 and Apple TV+ 7 statuettes ^[8], after becoming the first streamer to win the Best Picture Oscar earlier in the year. ^[9]

Consumers now have many choices and competition along with rising inflation has harmed Netflix, but the new lower-priced ad-supported tier and the paid sharing option can help. Furthermore, the streaming giant touted on Tuesday its advantage over rivals, estimating that many of them are losing money, compared to tis $5-$6 billion of annual operating profit.

Netflix Stock

NFLX.us had collapsed after the earnings reports of the first two quarters of the year, and ended the first half having wiped out around 70% of its values. In Q3 however, it managed to post profits, mostly due to the strong performance of July, in line with the broader market.

This time, markets reacted positively to Tuesday's quarterly results and the stock gains around 12% in today's pre-market, at the time of writing.