Analysis: How Can Netflix Get Its Mojo Back?

In the parlance of old-time show business, Netflix (NASDAQ: NASDAQ:NFLX) laid an egg this week. The streaming service’s first-quarter earnings report, with its ill news of a 200,000 drop in subscribers — the first decline since 2011 — was greeted with a wave of negativity not seen since the critics’ screening for “Heaven’s Gate.” Even worse, the company’s profitable revenue stream was denigrated for not meeting the consensus’ expectations.

Sadly, the company went into panic mode and hastily began slapping ill-fitting Band-Aids on the scars that its critics carved into its flesh — promises of cracking down on password sharing and hints at adding advertising to its presentations were thrown about like New Year’s confetti. Shareholders were mostly unimpressed and the stock tanked, while the financial news media had a field day with the company’s perceived wreckage.

But in the calmness of retrospective analysis, Netflix’s situation could have been much, much worse. For Netflix to go forward, it needs a game plan that will acknowledge difficulties without being held hostage to them while building up its existing muscle. There are four key steps that Netflix should take in looking ahead into the near-future.

See Also: Netflix Shares Plunge After Q1 Earnings, First Subscriber Loss Since 2011

1. It’s A Different World Today: Quite frankly, Netflix in early 2022 was in the wrong place at the wrong time — a streaming service in mostly oversaturated markets that were being pockmarked by abnormal inflationary pressures. Translated: the target consumer for these services is probably already a subscriber, but ongoing economic challenges are forcing people to sacrifice streaming subscriptions as part of a cost-cutting regimen.

The good news is that Netflix is still the world’s leading streaming service with 221.64 million subscribers and a first-quarter profit of $1.6 billion in profit on $7.8 billion in quarterly sales, a 10% year-over-year revenue spike. If that’s your definition of a failing company, maybe you need a new dictionary.

The bad news is that Netflix is forecasting it will lose 2 million subscribers in the second quarter. But there is good news in that dismal forecast — rival streamers such as Walt Disney Co. (NYSE: NYSE:DIS), Comcast Corp. (NASDAQ: NASDAQ:CMCSA), Apple Inc. (NASDAQ: NASDAQ:AAPL) and Amazon (NASDAQ: NASDAQ:AMZN) are in the same boat and could see even greater losses. Indeed, a recent Deloitte survey determined U.S. streaming subscriber churn is 38%, with the main reason for cancellations stemming from rising subscription costs. (However, Deloitte also found 25% of customers who canceled a streaming service resubscribed to it within a year — go figure!)

And there is more good news for Netflix — the research company Antenna identified Apple TV+ as having the highest U.S. streaming churn rate at roughly 10.4%, followed by Comcast’s Peacock at 8.4%, Disney+ at 5% and Netflix at 2.2%.

2. Yes, There Are New Audiences: Netflix’s subscription data in the first quarter showed the company in a lopsided world: it lost roughly 640,000 subscribers in the U.S. and Canada during the quarter, as well as 350,000 in Latin America and 300,000 in the Europe-Middle-East and Africa super-region.

However, it also showed a net increase of more than 1 million subscribers in the Asia-Pacific region — much of that growth came from Japan, the Philippines and, most intriguingly, India, where it surpasses Amazon and Disney for popularity.

Netflix’s growth in Asia will not be welcomed news at Disney. Last September, that company’s Asia-Pacific President Luke Kang outlined a strategy to establish itself further in the region’s markets.

“We are not going to dabble — we are going to be a major player,” said Kang. “We always knew that local content would be really important. We will figure out [the volume] going forward.”

But until Disney figures it out, Netflix — which created a global sensation last year with its Korean production “Squid Game” — has been investing heavily in Asia Pacific titles, too, even going so far as to lure award-winning Japanese filmmaker Hirokazu Kore-eda to adapt an eight-part series based on the popular manga “Maiko in Kyoto: From the Maiko House.”

As for the EMEA market, Netflix’s winding down of 700,000 subscriptions from Russia after that nation’s invasion of Ukraine was a first-quarter anomaly — the company is investing heavily in European productions (especially French productions), and also announced a partnership with the Arab Fund for Arts and Culture to support production by female filmmakers in Middle Eastern nations, which will further its influence in that part of the world. The company knows its markets and is responding accordingly.

And while the African streaming market is still a work in progress at many levels, Netflix accounts for more than half of the continent’s streaming subscriptions. Tony Maroulis, a principal analyst for London-based Ampere Analysis, told the Hollywood Reporter, “In North America, about 50% of households have a Netflix subscription, a figure that’s pretty stable. In Western Europe, penetration is just under a third. In South America, just over a quarter. In sub-Saharan Africa, it’s less than 1%. So, there’s lots of room for growth.”

Maroulis added there were about 1.4 million subscription video-on-demand users in sub-Saharan Africa and he expected that number “to grow to 2.4 million by 2026.” The company is already investing in African content, most notably the South African "Savage Beauty" which debuts on the platform on May 12.

3. Is That All There Is? Unlike Disney, Apple, Amazon and the other major streaming players, Netflix has been pretty much moored to streaming services. That business model worked during the pandemic period when people were stuck at home and became infatuated with streaming, but things are different now and the company needs to broaden its horizon.

To its credit, Netflix is expanding into the gaming sector with its acquisitions of Boss Fight Entertainment and Next Games, and it has also become a presence at the Academy Awards by dominating the competition this year with 18 nominations spread across “The Power of the Dog,” “Don’t Look Up” and “Tick, Tick…BOOM!” Netflix only gave those films limited release for award consideration, but if it was willing to invest into nationwide theatrical releases it could open itself into another revenue stream, especially for its big-budget action films like “Red Notice.”

Perhaps Netflix can tap into special one-day-only special theatrical events — it worked for Disney when it teamed with IMAX (NYSE: IMAX) for a one-day special theatrical screening of the Beatles’ complete 1969 rooftop concert and for Trafalgar Releasing by offering the concert film “BTS Permission to Dance on Stage: Seoul” starring the K-pop superstar group.

Still, more endeavors might be helpful — perhaps non-fungible tokens (NFTs) for the digital crowd? Some industry observers have raised the idea of Netflix offering live sports, but co-CEO Ted Sarandos said on the recent earnings call the company “would have to see a path to growing a big revenue stream and a big profit stream with it.”

4. Content Is Still King: Ultimately, Netflix will retain and attract subscribers with strong content. Unlike Disney’s ability to milk zillion variations of “Star Wars” and the Marvel comic books, Netflix has to rely on original material and judiciously licensed material, such as its deal from last summer that gave it the exclusive U.S. rights to Universal Filmed Entertainment Group’ animated feature films.

But before anyone defines Netflix by the perceived failings of its earnings report, let’s remember this is the entity that has given audiences “Arrested Development, “House of Cards,” “Stranger Things,” “The Crown,” “Squid Game,” “Bridgerton,” “Bird Box,” “The Adam Project” and more than a few other titles of notable pedigree.

At the end of the day, the company needs to remember it's not beholden to Bill Ackman, but to global viewers who want something different, exciting and invigorating in their entertainment. Netflix has always outpaced its competition on content and it's showing no evidence of ceding ground.

Yes, Netflix’s first-quarter performance was not its finest hour. Nor will it be its last. That’s Show Biz 101, folks — not every production will be a hit, not every quarter is boffo, but you brush yourself off and keep moving without dwelling on the flops. Or as Orson Welles — who was no stranger to both glory and hardship — once opined, “If you want a happy ending, that depends, of course, on where you stop your story.”

NFLX Price Action: Netflix shares dropped 35% over Wednesday’s trading session (ouch!) to open on Thursday at $226.19 according to Benzinga Pro. Let’s see where the day takes it.

Photo: A scene from "Squid Game," courtesy of Netflix

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