As mentioned earlier i’m releasing a load of my recent analyst notes via this blog, here is the one i wrote yesterday, here we go…
If you keep your eyes on the news you will have spotted the Netflix Q4 announcement overnight. Whilst I appreciate that SVOD (Subscriber VOD) is primarily ad free there are obvious implications for commercial broadcasters as audiences leach out.
The headline figures are pretty punchy with global subscribers leaping 20% to 167m (this represented an 8.8m increase which natural meant a slowing of annual growth rates ) and with revenue growth accelerating at 30% to 5.2bn in Q4 the direction of travel is good as ARPU rises. However; further down the financials is where is gets a bit “sticky” with negative trends when it comes to cash generation (or lack of) at significant levels illustrating that the business is having to return to the markets for debt to finance growth. This combined with a £26bn debt pile (of which £14bn is long term) and cash generation not really improving means you do wonder when operations can be financed without debt.
In short Netflix is a heavily leveraged business that is currently structured to service debt (both long-term and shareholder) on the basis of subscriber growth only , a bit like Manchester United to paint a sports analogy. And like Manchester United we’re beginning to see the competitors strengthen and create the potential to take over.
The Hankins hot take – The biggest threat to Netflix is obviously the rise of Disney+ and Apple TV and maybe Amazon Prime if it gets its act together. Amongst all the Household views related to their shows they rather disingenuously report search data showing how many people have watched the new series of The Crown vs The Mandalorian and The Morning show and Jack Ryan. Based on the stats, I’d estimate a viewing share of circa 80% across these 4 programmes. This would suggest that a total of 35million watched these shows over a similar 4 week period (28m watched the Crown). Bearing in mind the penetration of these platforms (excluding the oddity that is Amazon Prime) its not really a surprise, we’ll have to wait and see whether there is cannibalisation or accompaniment but it does demonstrate the current scale advantage of Netflix.
The strength of content is clearly a factor and the generation of penetration driving content vs filler content. I recently heard the lovely phrase “Netflix is the worlds biggest producer of TV movies” which is a bit of faint praise, however these TV movies are very well produced and cost a lot of money; you have to question whether shows like 6Underground really drove new users to the platform, as amusing as Ryan Reynolds is (although 80m+ households did try to view it which means it was broadcast to 50% of total subs = retention play).
This is the bind Netflix find themselves in and as they pursue aggressive growth across multiple entertainment categories the risks increase, needing as they do to satisfy current users and attract new ones. They have recently moved into animation and are producing more and more locally produced shows, utilising local talent, which puts them directly in the path of existing broadcasters/producers at a local level (its why ITV is seen as a potential purchase for Netflix). Something of interest here is the reference to the BBC. The BBC are engaged in a strategic partnership of sorts with Netflix (amongst others) but there is clear admiration of the iPlayer as its referred to as a model for content referral. The commercial opportunities for the BBC will come into greater focus now that Tony Hall is leaving but this reference is another signal that we have a jewel in this institution and its worth protecting.
On the whole though the worry is the treadmill that Netflix are on suggests no real change in financials trajectory and with the rise of other streaming services I see ARPU declining as part of a price war. Netflix changed the market but now the market has responded and we’ll find out whether they have the strength to maintain their position or whether one of the truly BIG boys fancies buying them out. The content arms race is only going to increase which spells further acceleration of the flight from traditional players. I envisage a rapid fragmentation of content followed by a swift return to aggregation with fewer players remaining as consumers fight back against the “Faff”, we’ll see more actions like those Sky has instigated (Netflix is accessible direct on platform whilst HBO is solus) as intermediaries use a “one platform for all your content needs” as a clear hook for their acquisition needs.
I added the following as a raft of questions on whether I thought Netflix would start opening their platform to advertisers like Sky do in the UK
https://www.livekindly.co/ben-jerrys-just-launched-a-vegan-netflix-and-chilld-ice-cream-flavor/ – this is more likely in the short term. Product placement and licensing.
Advertising for Sky is free money as they make enough from other avenues. They also have their broadband offering and mobile offering now too.
The challenge is measurement on Netflix and real scale for advertising.
Estimated subs in the UK are 11.5m but growth is slowing. This is less than Sky. How much are you willing to pay for a pre-roll on self-reported platform? Knowing that 2 mins in they could drop out. We all know the problems with Facebook and Youtube. We’ll also find out how few of their huge programming investments actually get viewed.
Apple and Disney are unlikely to want to put advertising on their platforms. Can Netflix risk it in the short term?