Specialist
Former executive at Netflix Inc
Agenda
- Netflix’s (NASDAQ: NFLX) operating environment – subscriber growth dynamics and content spend
- Competition vs Disney (NYSE: DIS), Amazon Prime (NASDAQ: AMZN), Warner Bros Discovery (NASDAQ: WBD) and others
- Ad-supported tier development, launch and strategy plus password sharing crackdown
- Outlook for 2023 and beyond, highlighting revenue diversification opportunities such as gaming and sports streaming
Questions
1.
Could you share an overview of Netflix’s operating environment and pull out 2-3 trends or drivers impacting the business?
2.
Netflix had started off Q1-Q2 2022 with subscriber losses, which I think were a shock considering the company’s track record as it saw 200,000 or so losses in Q1 and then almost one million in Q2. Can you walk us through some of the drivers you’re seeing there? What were your reactions to the return to subscriber growth we’ve seen in Q3 with 2.4 million subscriber added? Do you think the storm has passed for the company?
3.
Netflix has publicised that it’s aiming for 4.5 million subscribers added for Q4 2022. What are your thoughts and expectations on its ability to deliver this? You’ve highlighted the ad-supported tier and its launch in a number of countries. What are some of the drivers at play for the company now?
4.
You discussed concerns about whether the release of Netflix’s ad tier will result in some cannibalisation of the overall subscriber numbers, highlighting the price point. AVOD [advertising video-on-demand] is USD 6.99 per month vs the cheapest no-ad option being at USD 9.99. As you also highlighted the backdrop of inflation and the macroeconomic environment, what are your thoughts on the pull and take of attracting new viewers through that lower price point vs seeing some shift from more price-sensitive viewers moving down from the higher paid tiers?
5.
You said the USD 9.99 tier seems most likely to downgrade, but also that Netflix has certainly been thinking about what CPM it could command and how that will play into its ARPU. The number publicised over summer 2022 was that the company might get USD 65 CPM, which is certainly above industry averages. How could the ad tier from a revenue perspective for Netflix compare to a USD 9.99 sub? Is it going for matching or might the company be hoping potentially the ad-supported tier will be more accretive than the USD 9.99 subs?
6.
Do you think USD 3 is the minimum ad ARPU? Certainly it’s hard to say as we need to see how successful the ad tier launch is and whether it can command the CPMs. What is a best-case scenario for Netflix? Could the company potentially have that ad tier getting close to as accretive as the USD 15.49 per month? What are your thoughts on the ceiling here?
7.
Netflix has stated that it’s expecting to reach 40 million viewers globally by Q3 2023 on the ad tier. Do you think that is an achievable target? If not, what do you expect the company can reach there?
8.
Of many of the streaming players, Netflix has been one of the most vocal about its efforts and initiatives to crack down on account and password sharing and trying to get some monetisation of viewers who may be engaging with the platform but not necessarily paying for it. What are your thoughts on its progress so far along those initiatives? There has been limited rollout in some LATAM markets. What are its prospects for success in this endeavour?
9.
You mentioned other players may follow suit on password sharing crackdowns, but as of right now it seems most are waiting to see how this plays out. Do you think this is a question of some scepticism, if this will generate too much public pushback or is more technologically challenging than anticipated? Or are the other players focusing on growth and seeing how much can be done here vs whether growth may be more challenging?
10.
You highlighted the idea of other companies’ positioning being a major factor in why Netflix is at a different point, certainly being the streaming giant and being here for so long. Is the fact that the US market is fairly mature and highly saturated with so many players the reason why the company is reading the writing on the wall that it needs to do more to crack down on password sharing? Or is this also a reflection of Q1-Q2 2022, perhaps seeing that as a call to action to do more to generate positive results when there’s a lot of scrutiny on some of its lacklustre results in terms of subscribers loss? What are your thoughts on the timing and the thought process for Netflix deciding to make this move?
11.
Continuing along the vein of diversifying revenue, you highlighted Netflix’s move into video games. The company recently made some headlines with acquisitions in Europe and California, getting some more game studios into the fold. What are your thoughts on the progress made so far? It seems that video games have not been overly successful. The most recent numbers were that only about 1% of subscribers were playing games on a daily basis. You mentioned this is an opportunity to perhaps get some more diversified revenue streams, such as in-app purchases. How much of an opportunity is gaming, from a revenue generating or retention perspective for engaging viewers with the platform more frequently and potentially keeping subscribers?
12.
You highlight that gaming could be a large opportunity, and looking at the growth rates for the video game industry as a whole, there is definitely a lot that could be achieved there. You mentioned Netflix already has Stranger Things and I believe it’s done some development for the games along there, but still hasn’t necessarily seen traction. Considering how big the video game space is and the number of players who are doing quite well, why do you think the company can be successful here? It's bought some small game studios, but it’s definitely not on par with large players such as Take-Two and Activision Blizzard, which Microsoft is in the process of acquiring. How challenging might this be for it? What could Netflix’s partnership with Microsoft look like if this was another aspect outside just the support for the ad tier?
13.
You highlighted the USD 17bn content spend for Netflix. Returning to your point about the exploration of sports streaming rights, what do you see as the content strategy for the company going forward? For the longest time it seems to have been aiming to be something for everyone and taking a lot of risks for a wide variety of content, but that’s now juxtaposed with the increasing pressure to drive more profitability, tighten the belt and be more deliberate or strategic with spend. What are your thoughts about its approach to content development and which projects could be green-lit going forward?
14.
Looking at the idea of fewer swings and taking a more deliberate approach to content spend, there’s potential to drive success if each of those swings is great, but it also does increase the individual risk of any given project if it does not take off. How is Netflix thinking about appeal to certain audiences, focal points, dramas vs different types of content and so on as it starts to formulate this new approach to making each swing count more and having fewer but more deliberate ones?
15.
Could you discuss Netflix’s different types of content and how that can appeal for certain advertisers vs not be that appealing, regarding what content may be shown on the ad vs non-ad tier? Do you think there will be a bit of a bifurcation? What exactly does that look like near-to-mid-term and in the long term? Certainly, the company will want to continue to have the Squid Game-type shows, which are certainly intense dramas but not necessarily ad favourites.
16.
You mentioned some of Netflix’s moves into sports streaming, and a number of players have already looked into sports streaming. Peacock has soccer as well as a variety of other live sports. Has this just been a matter of time for Netflix? How does this vie with looking at deliberate content spend? A lot of the major sports packages you highlight, Netflix is mainly going after fairly niche ones – there’s a big difference between surfing vs the NFL Sunday Ticket. How do you think the company will approach sports streaming as being pivotal and a focal point for its content going forward vs making sure there is ROI on the content on its platform?
17.
Looking at a couple of examples you pulled out – Amazon for football, Apple with baseball and MLS [Major League Soccer], and Disney with ESPN and the sport choice it has – contrasting with Netflix. These players have very diverse revenue streams. As you mentioned with Amazon, many Prime members are there for the e-commerce aspect, the free shipping. Because of the different circumstances and revenue streams for each of those businesses, can Netflix ever really compete to be viewed as a sports streaming platform? The price tag for a lot of the major sports is quite high –the NFL Sunday Ticket deal could be over USD 2bn. What are your thoughts on the other players trying to carve out the space for sports, considering they are fundamentally quite different businesses?
18.
Could you share an overview of the competitive landscape and the change in focus across the industry, from looking at subscriber growth to pushing for profitability and tightening up expenses? Given the backdrop of the TAM shifting, could you highlight some major players in more depth?
19.
You mentioned the environment will be quite challenging for the competitive set, for a variety of reasons. Disney, though, recently reported earnings and has reached up to 236 million total subscribers across its platforms. Looking at that subscriber growth, it could be argued the skies are a little sunnier for the company, although its losses from streaming have ballooned, more than doubling YoY. What are your thoughts on it as a player, as certainly its growth seems to have continued globally? How do you think about the competition from it, considering that across its platforms it has more subscribers than Netflix?
20.
I want to follow up on the Disney front. You mentioned the price increases, which are coming in December 2022, alongside the release of the company’s own ad-supported tier for Disney Plus. Do you think that could change the story and the landscape? It seems there’s a lot of opportunity for Netflix’s ad tier and the potential impact on the industry.
21.
You highlighted Netflix’s partnership with Microsoft and potentially opportunities to deepen that partnership with more involvement within gaming. Another rumour is whether Microsoft could be an acquirer of Netflix. What are your thoughts on this or the M&A possibilities for Netflix right now?
22.
Outside a potential Microsoft deal, there’ve been a lot of other rumours over summer 2022 as Netflix was thinking about building its ad tier, perhaps of a Roku acquisition. Are there any other developments, worth highlighting, or perhaps things the company should focus on and bring into the fold? You mentioned its foray into consumer as it works to diversify revenue. What are your thoughts there?