In turn, Netflix evaluates cheaper plans with ads; understand

In turning Netflix into the world’s biggest streaming service, one of the mantras of the Reed Hastings administration was that his staff “tell the emperor when he’s naked.”

With Netflix losing nearly two-thirds of its market value since November and analysts comparing its slump to the “dot-com” crash, Hastings has finally taken his own advice and admitted that his corporate strategy may be seriously underestimated.

Over the course of an hour on Tuesday, the Netflix founder and chief executive abandoned principles he had long espoused, reorienting a media group that shifted Hollywood to deal with leaner times of slow growth and contention. of spending.

Password sharing? In 2016, Hastings joked “we love seeing people sharing Netflix”. Now he intends to repress this practice; Hastings estimated that 100 million people are sharing accounts.

Competition? For years, he dismissed the threat from Disney, Apple and HBO, insisting that Netflix’s biggest competitors were Fortnite, YouTube and “sleep”. On Tuesday, he admitted that Netflix needs to “grow up a little bit” because its competitors have “some really good shows and movies.”

But perhaps the clearest shift has been in advertising. Having always championed Netflix as an ad-free zone that allows viewers to “relax” without being “exploited”, Hastings opened the door to marketing money.

Casually mentioning the change in strategy during a call with analysts, Hastings announced that Netflix would work on a cheaper, ad-supported version of its service “in the next year or two.”

And the expenses? Netflix single-handedly created a streaming model where the stock market rewarded it for spending more. The company burned money for years as investors applauded its rapid subscriber growth and commitment to constantly producing new TV shows and movies. For the first time, the company said on Tuesday that it will reduce its content spending.

“It was shocking,” summarized MoffettNathanson analyst Michael Nathanson. “These guys looked like any other management team that still didn’t have the answers.”

The turnaround is a humbling moment for a company that, while seeing its subscriptions increase at the height of the pandemic, was confident enough to start proactively canceling accounts for people who weren’t using them.

After a historic stint on the stock exchange as one of the big tech companies “Faang” (Facebook, Apple, Amazon, Netflix and Google), reaching a valuation of nearly $310 billion in October, it has shrunk to $95 billion. Netflix shares dropped more than 38% on Wednesday alone.

“We saw a company go from growth darling to growth purgatory in an instant,” said Nathanson.

One of the most painful decisions for Hastings may have been about publicity.

Its rivals had long predicted that Netflix would eventually back down from the anti-advertising stance that Jason Kilar, a former Warner Media chief executive, recently likened to a “religion.” But few imagined it would arrive so soon.

“The way you get a billion [de assinantes] It’s not about continuing to charge a premium price without ads,” Kilar said. “[A Netflix] will surely come to that conclusion.”

Morgan Stanley expects that over the long term, Netflix could earn “billions” from advertising, estimating that ads generate about $3 billion in revenue a year for rival service Hulu.

But analysts at the bank also questioned whether the option to offer cheaper subscriptions would boost the company’s revenues, as it has already convinced 75 million households in the United States and Canada to pay an average of $15 a month. “By moving customers to an ad-supported tier at a lower price, you can generate [receita] highest overall? This is less clear.”

Mark Read, chief executive of advertising group WPP, said the change in strategy reflects the need to reach new customers and the clear “limits of subscription-only growth models.”

“History has shown that successful media companies have subscription and advertising,” he said. “Undoubtedly, the pressure on household budgets, as well as the growing number of subscription offers, have concentrated the minds of consumers.”

The challenge for Netflix is ​​to introduce a subscription plan with ads without consuming its existing subscriber base, or dedicating a lot of time and money to building an advertising business that it once considered distracting.

After years as a market leader in subscription video services, Netflix must adjust to its latecomer role in ad-funded streaming, learning from Disney, Discovery, Paramount and NBC. “There was never a fear that we were in trouble,” said a former Netflix executive. “The feeling was, we’re leap years ahead.”

Now it faces stiff competition from the world’s biggest media and technology companies, which have had great success with television shows like Apple’s Ted Lasso and HBO’s Succession.

Among some investors and analysts, there is a feeling that Netflix’s generous spending should yield better programming. “If you spend $18 billion on content, I’d like to think you can convince people to join your streaming platform,” said one of Netflix’s top 10 shareholders.

But the stock price slump is worrying for the entire entertainment industry, as the biggest US media groups have earmarked more than $100 billion to spend on content this year alone, trying to emulate the Netflix model.

Now Hollywood is questioning whether Netflix executives have seriously overestimated the size of the streaming market.

Netflix has 222 million paying subscribers, and Hastings told investors that his “total addressable market” was any home in the world with internet access — potentially a billion subscribers. There was plenty of room for growth and ample room for new competitors, he insisted.

But as its growth has stalled, analysts are punching holes in those optimistic assumptions.

Given the accessibility issues and global access to digital payment systems, Nathanson estimates the “real” addressable market is closer to 400 million.

Equally troubling, he questions whether Netflix has already reached full saturation in the US and Canada, where the company revealed on Tuesday that 30 million more people are sharing accounts in addition to its 75 million existing subscribers. The number of pay-TV subscribers in the US during television’s peak in 2011 was around 100 million, indicating that Netflix may have hit its biggest market.

This is bad news for other media groups because their ratings were referenced with that of Netflix. Warner Bros. Discovery shares fell 5% on Wednesday, while Disney was down 4% and Paramount Global lost 10%.

Rich Greenfield, an analyst at Lightshed Partners, noted the irony that streaming champions like Netflix and Disney are now embracing advertising, a key pillar of old media strategy, to revive their businesses.

“It’s scary if the only way to reinvigorate growth is to offer cheaper products that make the consumer experience worse, essentially making it more like the dying linear TV experience,” he said.

Translated by Luiz Roberto M. Gonçalves