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Netflix faces a dystopian future in which hits don’t guarantee growth

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Netflix seemed to be on a roll heading into the final quarter of 2021, with the dystopian Korean drama squid game attracting millions of viewers and 150 original programs ready to broadcast, including Don’t look up, starring Leonardo DiCaprio and Jennifer Lawrence.

This was, according to the company, its “strongest content slate ever”.

But star-studded new releases weren’t enough to give Netflix a significant subscriber boost in the fourth quarter. The video streaming pioneer said Thursday that 8.3 million new subscribers signed up for the service in the fourth quarter, the lowest number it has added since 2017.

Worse still, it projected it would only add 2.5 million subscribers in the current quarter, down from 4 million last year and well below its first-quarter performance in each of the last five. years. Investors sold the stock on Friday, sending shares down nearly 22% to $397.69. They have fallen more than 40% since the height of squid game mania in November.

Beyond the weak forecast, the company’s performance has raised bigger questions about its business model. Among them: what if popular new shows are no longer enough to attract many new Netflix subscribers?

squid game released a week ago [the fourth quarter] started, but Netflix’s All-Time Biggest Hit wasn’t enough to add subscribers,” said Needham & Co analyst Laura Martin, who has a sell rating on the title. “Content is no longer a competitive advantage,” especially with traditional media groups investing heavily in their own streaming services.

Netflix is ​​expected to spend $18 billion on content this year, according to Morgan Stanley estimates, as it seeks to maintain its lead over rivals including Disney Plus, AT&T’s HBO Max, Apple TV Plus, Amazon Prime, Paramount More ViacomCBS and others. The FT has estimated that eight US media companies will spend $140 billion on content this year as the streaming wars escalate, and analysts expect spending to grow by double digits over the next few years.

Investors seem to realize the high cost of the streaming business – and the often short shelf life of content on the services. After Netflix’s report, MoffettNathanson analysts noted that the “decline rate” of streaming content was “incredibly fast,” especially when popular programming could be consumed in a single night.

That means “streamers must continually spend on new content to attract and retain new members, with any slowdown in that spending leading to a weaker quarter” for subscriber growth, the company said in a research note.

“We wonder whether or not streaming is good business,” said company analyst Michael Nathanson. “It requires a ton of fresh content.”

Netflix said higher content spending squeezed operating margins to 8% in the fourth quarter, down 6 percentage points from a year earlier. Increasing its margins significantly would mean spending less on content, which many consider unlikely given the intense competition in the streaming market.

Netflix raised its prices in the United States this month to $15.50 per month from $14 – a premium to the $8 per month charged by Disney Plus. Netflix officials pointed out last week that subscriber churn declined in the fourth quarter, and they said plans to break even and become free cash flow positive this year were on track. .

Netflix, Disney and other streaming companies racked up huge subscriber gains during the 2020 shutdowns, but a return to more normal routines has slowed growth.

The company blamed the disappointing subscriber growth in part on “macroeconomic challenges in several parts of the world,” particularly in Latin America. He said the competition “could affect our marginal growth,” a rare acknowledgment that it faced pressure from other streaming services. But he added that he continued to grow in all the countries where his rivals had launched.

Reed Hastings, chief executive of Netflix, said it was difficult to determine the cause of the slowdown because “Covid has introduced so much noise”.

But Martin said Netflix underestimated the impact of growing competition on its subscription growth. “Part of the problem is that Netflix doesn’t think they have a problem,” she said. “I’ve come to the conclusion that the competition is real, but they haven’t come to that conclusion yet.”

She said the streaming market would become more stable once there was a period of consolidation, which she said would happen in three years or sooner.

“Three [streamers] must go bankrupt and three must survive,” she said. “And then the content can become more reasonably priced.”

For his part, Hastings said there was no reason to question the company’s trajectory. “We remain calm,” he said.

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