Company / division: Netflix
Netflix Raising 1 Billion Euros to Cover Negative Cash Flows from Content Investment (Apr 24, 2017)
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★ Netflix Reports Q1 2017, Gains 5m Subs, Makes First Profit Internationally (Apr 17, 2017)
Note: this is my first piece of commentary on Q1 2017 earnings. The Q1 2017 tag attached to this post will eventually house all my earnings comments for this quarter, just as the Q4 2016 tag does for last quarter and the earnings tag does for all past earnings comments. Netflix is also one of the dozen or so companies for which I do quarterly slide decks as part of the Jackdaw Research Quarterly Decks Service. See here for more.
Netflix today reported its earnings for Q1 2017, and the results were mostly good, with a few possible red flags. This year, the new season of House of Cards will debut in Q2 rather than Q1, and that makes some of the year on year comparisons tough. One of the results was much weaker Q1 subscriber adds this year than a year ago in the US, worsening what’s already been a trend of slowing growth for several years. Netflix is projecting something of a recovery next quarter, however. In some ways, the biggest news was the first quarterly profit for the international business, which has neared profitability in the past but been plunged deeper into the red by market expansions every time it did so. Now that Netflix is in essentially every country it can be, that won’t be the case anymore, so although it’s projecting a return to small losses next quarter, it’s now saying it wants to be judged partly on growing revenue and margins globally over time, which is a big shift (previously it wanted to be judged on sub growth and domestic margins only).
There were a couple of mild admissions of failure: customer satisfaction in Asia, the Middle East and Africa is not what it could be, and the company’s Crouching Tiger sequel didn’t achieve its goals for original content. Marketing spend will be up at least a little in 2017, and content obligations continue to grow. The company also made clear that the big free cash flow losses caused by its investment in original content will continue for “many years”, though it also said that it will eventually throw off significant cash when it hits a “much larger revenue base”, giving I think the clearest indication yet of what a long-term project positive free cash flow will be. In the meantime, it will continue to borrow to fund that growth. Domestically, profits are growing very rapidly, and the theory continues to be that eventually the International business will reach that level of maturity too and deliver decent margins. But in the meantime, a bet on Netflix continues to be a bet on continued high growth, something which certainly isn’t guaranteed in the US and may end up being tough long term internationally too.
via Netflix Shareholder Letter (PDF)
Netflix: The Monster That’s Eating Hollywood – WSJ (Mar 24, 2017)
The headline here is indicative of the language used by some TV execs in the article, but that rhetoric feels pretty overblown, along with the suggestions that Netflix is somehow singlehandedly doubling the fees actors ask for or squeezing other players out of the business. Yes, both Amazon and Netflix are raising prices for acquisitions of indie movies at Sundance, but no, they’re not having that dramatic effect on the entire industry, not least because they’re still just a fraction of the size of the industry as a whole. The reality is that competition has been intensifying for years because the industry is getting tighter in an age of shrinking audiences and higher standards, and Netflix and Amazon aren’t to blame. Having said all that, the article is likely indicative of a souring of relationships between Netflix and traditional media companies, and if that continues we’ll likely see more content pulled from Netflix and other SVOD services, which just validates Netflix’s massive investment in original content which no-one can take away.
via WSJ
Netflix still has a huge lead in the streaming wars, but Hulu’s smaller service has loyal users (on TV sets) – Recode (Mar 22, 2017)
I added the parenthetical in the headline because that’s the key caveat here, as the piece itself points out. There’s a great chart in here comparing penetration of TV viewing over WiFi by various services with the average hours spent viewing those services in households that use them, and it highlights Netflix’s dominance as both the most popular and most used service within that narrow viewing category. Hulu does well on time spent too, though with far fewer households, while Amazon Video comes bottom of the four, and YouTube has reasonably high penetration but low time spent (again, on TVs in homes). Obviously, all four services can be viewed outside of homes too, and it’s YouTube in particular would score much higher in a mobile-only comparison. But for the other three services, in-home viewing on a TV is a critical segment of the audience, and it’s worth noting the order on that basis: Netflix first, Hulu second, and Amazon third. Sadly, there’s no traditional content in here for comparison’s sake – much higher percentages take pay TV services in the US than any of these services, and time spent is quite a bit higher too. The full Comscore report (linked below) is well worth reading in its entirety – lots of other interesting data points.
via Recode (source Comscore report here)
Netflix will explore mobile-specific cuts of its original series – The Verge (Mar 16, 2017)
Like the recent choose-your-ending report, this is something Netflix is merely experimenting with rather than something it’s going to be releasing imminently. But one of the advantages of commissioning and owning original content is the freedom to do interesting things with it, including chopping it up in different ways for mobile devices. I’m not quite sure how this would work in practice – in general, it’s pretty tough to take content created for one format and make it as compelling in smaller chunks or edited down, and Netflix will likely be best served by creating content specifically for mobile, but we’ll see. It has in the past (and even recently) said that it doesn’t create content with specific screens in mind, but that mindset seems to be changing subtly.
via The Verge
Netflix Tries to Outdo Theaters With Films a Studio Can Envy – Bloomberg (Mar 14, 2017)
Netflix is seriously ramping up its original content investment, something it’s been talking about for some time. And recent flops notwithstanding, it’s had some really good content over the past couple of years. Now it’s shifting its focus to commissioning and acquiring more and bigger budget movies, and plans to release around 30 in 2017 including some starring big names like Will Smith, Brad Pitt, and Tilda Swinton. That number is impressive – none of the major traditional studios or distributors had more than 24 movies in market in 2016 and Disney, for example, will have only eight movies on its slate in 2017. Now, Netflix’s productions are generally smaller budget affairs – it’s acquired movies at Sundance and other film festivals, where the average acquisition price has risen from $2 to $5 million over the past few years but it’s also commissioning some bigger budget films, though nothing in the multi-hundred million range just yet. But this is yet another way for Netflix to set itself apart from Amazon, HBO, and other big names in the subscription video business. As of right now, Netflix has 119 originals slated for future release listed on its website, and 28 of those are films, so its main focus is still on series (each of which will obviously provide far greater total viewing time than a single feature), but movies are going to be increasingly important going forward as part of that mix.
via Bloomberg
Marvel’s ‘Iron Fist’ critics rating: 0% on Rotten Tomatoes – Business Insider (Mar 9, 2017)
Netflix’s original content has always been a mixed bag – on the one hand, shows like House of Cards won awards (and also won Netflix lots of customers), but on the other there was Marco Polo, which critics panned (it has a 24% score on Rotten Tomatoes) but audiences enjoyed anyway (the corresponding audience score is 93%). Given that Netflix doesn’t release any kind of viewing data, it’s emphasized positive critical response as a validation of its original content, but it’s also defended shows like Marco Polo as being popular with real people even if critics didn’t like them. This new show has done even worse than Marco Polo with critics, but there’s a decent chance audiences will lap that up too. The fact is that any content production is a gamble, and given that Netflix doesn’t use Amazon’s pilot model to select new shows, that gamble is that much larger, especially with a big budget, Marvel-branded show. Only Netflix knows what its internal calculus on what makes a show a success or a failure looks like, but I’m guessing a one-off critical panning won’t do too much damage to its original content strategy. If it starts to become a pattern, however, that would be more worrisome.
via Business Insider
Netflix lets you literally choose your own adventure – Axios (Mar 6, 2017)
The headline here should be in future, not present, tense – Netflix is only experimenting with this idea for now, not rolling it out to users on its service. For one thing, content has to be created with this objective explicitly in mind, and it will take time to create that content, as well as to create the user interfaces to enable the interactivity which currently doesn’t exist in Netflix. But this does highlight how a digital native platform like Netflix can do things traditional TV companies simply can’t. Whether or not that ends up being compelling for users will depend a lot on the content – I can see this being a novelty at best in the early running until it shows up on some really top notch shows or movies.
via Axios
23% of US Adults Stream Netflix Daily – Leichtman Research Group (Mar 6, 2017)
There are lots of interesting numbers in this Leichtman Research Group survey, and I just picked one of them for the headline here: that very nearly a quarter of US adults use Netflix every single day. That’s pretty remarkable off the back of under 50 million paid subscriptions in the US. Also worth noting: the vast majority of Netflix viewers (81%) watch Netflix on a TV (by implication, at least sometimes) – this isn’t just people watching on phones and computers, meaning it’s a much more direct substitute for traditional TV viewing. More US households now have Netflix (54%) than have a DVR (53%) for the first time. And there’s lots more here too – the reality is that viewing habits are shifting dramatically, while the underlying spending on pay TV still hasn’t shifted at all, and that’s because many households still feel that traditional pay TV offers either decent value or the only way to get the content they have to have, even if they’re also paying for Netflix, Amazon Prime, Hulu, or something else. Somewhere in the next couple of years, that reaches a tipping point – no market has ever gone for too long with a dramatic mismatch between usage and spending – but it doesn’t feel like we’re there yet.
Netflix uses AI in its new codec to compress video scene by scene — Quartz (Mar 2, 2017)
This feels like a somewhat gratuitous use of AI here by Netflix – maybe this is technically AI, but it’s hard to see how it’s not just image analysis. But the broader point here is that this is an often overlooked aspect of Netflix’s differentiation: its technical capabilities in video delivery. Yes, its investments in original content and its massive and rapidly growing scale globally are huge advantages over the competition, but its content delivery networks, compression techniques, and a host of other technical capabilities are also key to making its user experience better. And this is another area where it often feels like it will take competitors a long time to catch up even if they ever decide that’s strategically important.
via Quartz
Historic Oscar victories for ESPN, Netflix and Amazon – CNN (Feb 27, 2017)
Amazon and Netflix both won their first Oscars this year, though Amazon seems to have got most of the attention because its awards were for features, whereas the sole award Netflix received was for a short documentary. Interestingly, though, as far as I can tell the two Amazon wins were for properties it had nothing to do with until it acquired the distribution rights, whereas Netflix backed its short The White Helmets as one of several production companies behind the film (and was also the main backer of The 13th, Ava DuVernay’s feature-length doc, which lost out in that category). That’s an important difference – Netflix can claim that it was behind a winner from the beginning, whereas Amazon only acquired its two movies when they were finished and showing at festivals to strong positive responses. Still, it’s great validation for both platforms and a further indication that they’re increasingly important powers in the movie and TV worlds.
via CNN
Samsung’s reputation nosedives in the US after Galaxy Note 7 snafu – The Verge (Feb 20, 2017)
As usual, it would be great to understand in more detail the methodology behind this survey, but it’s not available. The Verge seems to have got the rankings wrong – from what I can tell, Samsung was 7th and not 3rd last year – but it’s also worth noting that Samsung’s score dropped from 80.44 to 75.17, which sounds a lot less dramatic than dropping from 3rd (or even 7th) to 49th. The fact is that there are a lot of companies clustered together between 75 and 87 points and so a small drop in the score produces a big drop in rankings. Since the survey was also conducted in November and December last year, when the Note7 debacle was still very fresh in people’s minds, I’m guessing it would score a lot better just a few months from now. Though the Verge picked up on Samsung’s drop as their headline, it’s worth noting where other tech companies sit too: Amazon is #1 (score 86.27), Apple #5 (82.07), Google #8 (82.00), Tesla #9 (81.70), Netflix #18 (79.86), and Microsoft #20 (79.29), all of which classify as either very good or excellent. It’s also worth noting that big cable companies like Comcast and Charter score in the low 60s, which qualifies as “poor”, while the major wireless carriers score 66-72 (“fair” to “good”), with T-Mobile top and Sprint bottom.
via The Verge (official release here)
E.U. Agrees To See-As-You-Travel Online Cross-Border Access – Variety (Feb 8, 2017)
This is bad news for big content service providers like Netflix and Spotify. This first step appears relatively benign, because it’s simply about using services you’ve already bought while traveling through the EU. But it’s the first step down a slippery slope which is explicitly intended to lead to an eventual single “digital market” across the EU. That means no more charging different rates or offering different content by market, regardless of whether the content may be considered more or less compelling in different countries, or whether local spending power is lower (there’s more than a tenfold difference in GDP per capita between the poorest and richest countries in the EU). This will be hardest on video services, which tend to be very country-specific, than on music services (which tend to offer more or less the same catalog everywhere). No wonder the big providers are fighting it.
via Variety
Netflix Plans New Toys, Merchandise Based on Hit TV Shows – Bloomberg (Feb 7, 2017)
This is an interesting but totally logical move from Netflix – I just listened to Disney’s earnings call earlier this afternoon, and was reminded once again of how big a chunk of revenue the company derives from merchandising (not to mention theme parks and other businesses which piggyback off characters from its movies and TV shows). I’ve already seen smaller tie-ins like King Julien showing up on my kids’ yogurt, and it sounds like Netflix has done some more direct merchandising with Hot Topic already too. So this is a very natural evolution, but it’s interesting to see Netflix describe this as mostly about marketing rather than driving a big new revenue stream. In time, it could certainly achieve both, and that’s another helpful way to offset some of the big spending on original content.
via Bloomberg
Eyeballs Are No Longer Enough for Netflix – WSJ (Jan 17, 2017)
This piece is largely speculation – there’s no evidence presented that investors are impatient for Netflix to start churning out bigger profits or reducing its cash burn. Rather, those investors seem to understand that rapid international expansion at the expense of short-term profits is key to longer term success for Netflix, because it drives much faster overall growth and helps spread the cost of content over more users. Netflix’s domestic business is already very profitable on a contribution basis, while its international business is profitable on the same basis in some markets. Growing and getting past the early high investment in customer acquisition in other international markets should put Netflix in the black there too. Netflix definitely does need that growth – at the rate it’s increasing content spending, it has to grow revenues to stay ahead of costs – but on balance I’m fairly bullish about Netflix’s ability to make its strategy pay off.
via Eyeballs Are No Longer Enough for Netflix – WSJ
Netflix Wants the World to Binge-Watch – Bloomberg (Jan 12, 2017)
Though the headline is accurate, the whole point of this article is that Netflix isn’t taking a single global approach to expansion, but instead is focusing on creating localized content for various different markets, with the focus of this article its efforts in Brazil. One of the big challenges for Netflix as it expands is balancing the massive scale economies it gets by offering the same content in many markets against the need to provide culture- and market-specific content to differentiate in individual markets. The latter is of course potentially expensive, but it will be hoping that investing in one major market in a region helps attract customers in other markets in the same region, and Narcos is a great example of more regionally-oriented content. However it pans out, for now Netflix is streets ahead of any other video provider in providing locally relevant content in many markets around the world.
via Netflix Wants the World to Binge-Watch – Bloomberg
Apple, Facebook and Google top Greenpeace’s clean energy report | TechCrunch (Jan 10, 2017)
Apple has invested enormously in its green initiatives under Lisa P Jackson, arguably one of the biggest and most visible changes under Tim Cook, who seems determined to use Apple’s power for good beyond the influence of its products alone, to a much greater extent than Steve Jobs was. For Apple to come out on top of the major tech companies is still quite an achievement, though Google and Facebook also did well. It’s not clear that most consumers care all that much about any of this, but there’s an argument to be made that these companies are seen as leaders in the field, and Greenpeace’s endorsement puts pressure on others to fall in line, which has broader environmental benefits.
via Apple, Facebook and Google top Greenpeace’s clean energy report | TechCrunch
Netflix never slowed down in 2016 – Engadget (Dec 23, 2016)
This is a decent summary of Netflix in 2016 – a rapid international expansion coupled with a paring back of purchased content and a ramping up of original content, which is a pretty good summary of Netflix’s strategy at the moment too. The challenge continues to be finding growth domestically, where growth has slowed quite a bit, and driving profits overseas, where growth is strong but loss-making.
via Netflix never slowed down in 2016