For years now, Netflix has focused more on people than on money, focusing more on subscriber adds than profit or revenue. However, according to the company’s recent letter to shareholders, that’s about to change: When I step back and think about what really matters long term, beyond subscriber growth, it’s winning—being the global leader in streaming and original content, wrote Reed Hastings, founder and CEO of Netflix.
Netflix has a message for investors: stop worrying so much about membership growth and start concentrating on revenue and profit.
In its quarterly shareholder letter, Netflix presented their position with a number of incisive remarks. The biggest streamer in the world said that it will cease predicting paying subscriber additions. The purpose of the adjustment, according to the corporation, is to shift investor attention away from client development and onto revenue.
As it released financial results for the third quarter on Tuesday, Netflix stated, “We are more focused on revenue as our key top line indicator.” This will be especially crucial when we create new income streams like paid sharing and advertising in 2023, where membership will only be a small percentage of our revenue growth.
In addition to continuing to publish subscriber additions every quarter, Netflix will continue to offer forecasts for revenue, operating income, operating margin, and net income – standard profitability indicators. It just won’t be able to predict the future.
The large range of income per user is one factor driving the change. On November 3, Netflix will launch a new advertising-supported tier for $6.99 per month. Alternatively, a member may pay $19.99 per month for Netflix’s premium, ad-free service.
According to Spencer Wang, vice president of finance at Netflix, “Focusing on subscribers in our early days was useful, but now that we have such a wide variety of pricing points and varied partnerships all around the world, the economic effect of each particular user may be quite different.” “That’s especially true if you’re attempting to compare our company with our streaming services,” the speaker said.
Netflix’s advertising package and the upcoming restriction on password sharing should, theoretically, revive membership growth. Netflix, however, may consider periods with 10 million or more member additions as a thing of the past after adding 2.4 million customers in the third quarter on the strength of a “particularly excellent” programming lineup, headlined by “Stranger Things 4.”
Focusing on Netflix’s strengths
Netflix is aiming to shift investor attention away from the analogies to a pandemic age driven by rapid expansion and onto the reality that its streaming business really generates profits. This issue was specifically covered by Netflix in the “Competition” portion of their shareholder letter.
“It’s hard to build a big and profitable streaming business,” wrote Netflix. “Our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that may well be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit.”
To put it another way, Netflix claims to have established a strong streaming industry, whereas Disney, Warner Bros. Discovery, Comcast’s NBCUniversal, Paramount Global, and other companies hope to do the same. By consolidating and raising prices, some of Netflix’s rivals may succeed, the company conceded.
Contrary to subscriber additions, where Disney has the upper hand due to Disney+’s arrival in 2019, which is later in its growth cycle than Netflix, this is a blatant competitive advantage for Netflix. While Netflix lost 970,000 subscribers, Disney gained 14.4 million new Disney+ subscribers.
After hours, Netflix shares soared, hitting 14%. After losing clients in the first and second quarters, the organisation is once more acquiring subscribers. Netflix said that it will attract 4.5 million new subscribers over the upcoming quarter.
However, according to Netflix, we shouldn’t be concentrating on it any more. The issue is whether or not investors will pay attention.