Episode 5: Netflix

    Netflix is an American media services giant founded in 1977 by Reed Hastings and Mark Randolph. Headquartered in California, it is the world’s leading streaming and production company. 

    Pre-Lockdown Phase

    During the pre-lockdown period the company had been witnessing extraordinary cash flow burn. The major reason being the production of original content by the company. This had been translating into falling stock prices as investors developed a distaste for constant cash burns. Revenue increases had been unable to cover up the massive spending on content production making the investor group skeptical about the company’s business model. For the business model to achieve positive results Netflix had to focus on subscriber growth on an urgent basis to generate sufficient revenue. Also, monetising its content is important to compensate for cash burns and achieve success in the long run.

    During the Lockdown and Ahead

    However, the pandemic and resultant quarantine orders have proven to be a bliss for the company’s performance as strict ‘Stay at Home’ orders made people look for ways to entertain themselves while following social distancing rules. It has been experiencing a huge amount of internet traffic which even forced it to reduce its streaming quality in Europe to reduce network congestion problems.

    Media companies earn revenue by charging a subscription fee from users and by providing advertising space to advertisers. However, Netflix solely relies on its subscriber base to generate revenue. By not providing advertisers a platform, Netflix has been successful in providing quality experience to its users. But at the same time, it puts tremendous pressure on revenue growth as the company needs to work harder to achieve an increase in subscribers in order to generate more revenue.

    Due to the pandemic the total number of subscribers increased manifold during the lockdown period. As many as 15.8 million net subscribers were added to its user base during the 1st quarter of 2020 bringing the total count of users to 182.9 million across the world. This addition is much higher than the streaming content giant’s own expectations of adding about 7 million users during this period. The biggest expansion came from Europe, adding over 4.4 million new customers. Revenue grew to $5.76 billion, up by 27% year on year basis. Profits also doubled from 344 million to 704 million during the 1st quarter. These pandemic fueled results have led to sharp rises in the stock price of Netflix. While the S&P 500 index was plummeting, Netflix’s stock was shoring up.  With cinema halls ordered shut, the new content is finding its way on the over-the-top platforms without waiting for their theatrical releases. This has provided these media companies a tremendous opportunity to attract new users.

    Netflix has 3 operating segments. The domestic streaming division caters to members from the USA. The international streaming division consists of users from 190 other countries where Netflix provides its streaming service. The last one is the DVD-by-mail division the contribution of which towards the revenue has been falling for years. With the domestic market already saturated, Netflix has been trying to tap the international markets to fuel its growth. Hence, its performance in the international market acts as one of the biggest drivers of stock prices. Approximately 85% of the total user growth during the 1st quarter of 2020  came from the international streaming division. As a result of a stronger dollar during the previous months, this substantial user rise couldn’t translate into much higher revenues. The not-so-great performance in the international segment led to a fall in its stock price eventually after the earnings were announced.

    However, this overly positive outlook towards Netflix’s performance is not expected to go on forever as retaining these newly added customers would be a tough job. With lockdown restrictions being lifted gradually in many countries it will experience a fall in its user base as people start getting back to their jobs. The rise in the number of users was a one-time event which is not expected to be repeated anytime soon. As a result, Netflix informed its shareholders about a possible de-accelerated growth in its user base during the upcoming months in a letter addressed to them.

    Netflix may face a tough time to maintain its revenue growth. It increased the fee for its most popular plan twice during 2017-2020. Another such rise in the near future won’t be the right move if it doesn’t want to give away its market share to competitors like Disney+, Apple TV+, Amazon Prime etc. Netflix is already seen as a luxury in many developing countries because of the comparatively higher price charged by it. In the post Covid-19 world, with consumer spending hit hard, maintaining competitive prices is a must.

    Also, with filming halted due to the pandemic it needs to smartly plan the release of movies and TV series to avoid running out of new content too soon. Although, as per the claims of the chief content officer Ted Sarandos, most of the programming for 2020 is over and is currently in post-production stage remotely. Added to this is the fact that competitors like Disney+ and Amazon Prime boast of huge archives of content. Even though production activities have resumed in countries which have eased restrictions, uncertainty still prevails over timely completion of filming with the virus still out there, hampering the movement and interaction among people.

    Talking about the Scenario in India, Amazon Prime witnessed 67% growth in subscription followed by Netflix with 65% rise in subscriptions. This clearly indicates the existence of cut throat competition in this industry. Netflix’s popularity has been impacted since Disney ended the licencing agreement with it and pulled out content from its platform to show it on its own platform.

    The road ahead seems to be quite treacherous. The company definitely needs to do more in order to grow its share in unsaturated markets and be subscribers’s favourite OTT platform. This largely depends on how it designs its action plan for the post lockdown period. 

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