M+E Connections

As the number of major streaming video rivals continued to grow in the fourth quarter (ended Dec. 31), Netflix still sees new opportunities to grow subscribers and increase the amount of time that existing subscribers spend viewing its content, including through the addition of new features such as Shuffle Play, according to company executives and its latest quarterly letter to shareholders.

However, as usual, Netflix executives made it clear on the company’s latest quarterly Q&A webcast Jan. 19 that they see the best strategy is to just continue providing great content – lots of it, both from third parties and, especially, content it increasingly produces on its own.

“Our productions are back up and running in most regions,” Netflix pointed out in the letter. “We have learned that flexibility and adaptability are paramount in this fast-changing environment,” it said, adding: “With over 500 titles currently in post-production or preparing to launch on our service and plans to release at least one new original film every week in 2021 with extraordinary talent, we’re confident we’ll continue to have a great content offering for our members.”

As Netflix brings members “more great programming, we’re always listening and working to make it easier for them to find the right show and film to watch,” it noted in the letter. “That’s why last year we debuted our Top 10 lists around the world, and in October we introduced the New & Popular tab in our television user interface, which includes a new Worth the Wait section, highlighting titles as far as a year away that you can remind yourself about,” it explained.

As another step in that effort, Netflix has also “been testing a new feature that gives members the ability to choose to instantly watch a title chosen just for them versus browse,” it added. “The response has been positive and we plan to roll it out globally in the first half of 2021,” it noted, without providing additional details.

That feature, however, is likely Shuffle Play, which it has been testing. Without naming it on the earnings webcast, Greg Peters, COO and chief product officer, said: “I think Netflix members come to the service seeking to be entertained in a whole variety of ways. Sometimes they’re looking for a movie or sometimes a TV show or animation or scripted or unscripted, and sometimes they show up and they’re not really sure what they want to watch. And so we’ve had the opportunity to try and be innovative and try new mechanisms to sort of help our members in that particular state.”

One “example of that is a new feature that we’ve been testing and we’re going to now roll out globally because it’s really working for us where our members can basically indicate to us that they just want to skip browsing entirely, click one button and we’ll pick a title for them just to instantly play,” he said, calling it a “great mechanism that’s worked quite well for members in that situation.”

Other Opportunities

If theatrical release windows continue to get shorter, Netflix could “potentially” benefit with its own movies, according to Ted Sarandos, its co-CEO and chief content officer.

“We’ve looked at this before,” he said, explaining: “We’ve never had any issue with movies being in theaters. Our biggest issue has been that you had to commit to this very long window of exclusivity to get access to any theaters. That’s been the biggest challenge. So if those windows are going to collapse and we’d have easier access to films, to show our films in theaters, I’d love to have consumers be able to make the choice between seeing it out or seeing it at home, which is becoming the norm during COVID certainly – and we’ll see how much that sticks. …. But there’s a very different experience associated with going out and going to the theater with strangers and seeing a movie and it’s fantastic. It’s just not core to our business.”

Netflix is looking to see if, following Warner’s recent decision to make its films available on HBO Max simultaneously with their theatrical releases amid the ongoing pandemic, people continue to “both go to the theaters in significant numbers” and also watch them on streaming services even after the pandemic is over in the second half of 2021, according to Reed Hastings, Netflix co-CEO. “But we have to wait to post COVID to get a clean read of that,” he said.

Netflix is also “seeing growth everywhere,” according to Spencer Neumann, its CFO. In the combined U.S./Canadian market, “we’re roughly 60 percent penetrated and we’re still growing, so we’re still a very small share of even just pay TV penetration in most markets around the world” and represent a still “small share of viewing,” he said. “So we think we’ve got a lot of headroom in all these markets, and we’re just trying to get a little better every day,” he noted.

Although the U.S. is the “most penetrated market” for Netflix, “we’re still under 10 percent of television viewing time,” Hastings chimed in. Therefore, although
“we’ve got a lot of subscribers here in the U.S…. we still have a lot more viewing time that we would like to earn with an incredible service and incredible content.”

Meanwhile, “Africa has a ton of potential” for Netflix, Hastings also said, noting: “We’re doing more content there [and] we’re growing our membership.”

Increased Competition

Despite Discovery recently launching its own streaming service, Disney Plus expanding in new countries with more content, ViacomCBS unveiling its plans for Paramount Plus this year, and the recent launches of AppleTV Plus, HBO Max and NBCUniversal’s Peacock streaming services, Netflix remains upbeat that it can continue to be dominant in the streaming sector, according to Hastings.

The increased number of major streaming services “signifies that these companies all recognize the future is streaming entertainment, a vision we have been working towards since inception,” Hastings said. “Our strategy is simple: if we can continue to improve Netflix every day to better delight our members, we can be their first choice for streaming entertainment,” he noted.

“This past year is a testament to this approach,” he said, adding: “Disney Plus had a massive first year” – with 87 million paid subscribers – but Netflix “recorded the biggest year of paid membership growth in our history.”

The Numbers

Netflix had 8.5 million paid net additions in Q4 and crossed the 200 million paid memberships mark, the company said. For the full year, it added a record 37 million paid memberships.

For Q1 of 2021, Netflix expects paid net additions of 6 million, down from 15.8 million in Q1 last year, which was helped by the impact from the initial COVID-19 lockdowns, it noted.

The company, meanwhile, reported Q4 revenue grew 21.5% to $6.6 billion and revenue for the year increased 24% from 2019 to $25 billion. However, Q4 profit fell to $542 million ($1.19 a share) from $587 million ($1.30 a share).

The subscriber growth has happened despite Netflix raising pricing during Q4 in the U.S. and in December in the U.K., Neumann pointed out. That is because
“we’re continuing to increase the variety and value of what we’re delivering for our members,” he said.

The Netflix Q4 financial and subscriber results were “better than expected,” Jeffrey Wlodarczak, Pivotal Research Group analyst, said in a research note.

“Importantly, while NFLX beat subscriber expectations in all major territories, NFLX’s most mature market” — the U.S./Canada – “reported materially better than expected nearly +900K net new subscribers (vs. our +375K expectation) which highlights that the ultimate penetration for NFLX services globally could be higher than anticipated,” he said.