Don’t believe the hype: the streaming boom is far from over. Those writing off Netflix are going to look silly

The sector’s biggest player hit a road bump in terms of new subscribers, missing its own forecast. Wall Street duly had a tizzy but it’s missing the bigger picture, argues James Moore

Netflix overpromised to the tune of 2 million subscribers (AFP/Getty)

Wall Street’s laser-like focus on quarterly earnings reports frequently rob it of a sense of perspective. Case in point: Netflix. 

If you haven’t seen the numbers yet, you may know that in terms of subscribers, Netflix missed its own forecasts by quite a bit. A fatal mistake that. Overpromise and underdeliver and you’re going to get punished, and Netflix overpromised to the tune of 2 million subscribers, with the number rolling in at 208 million against its predicted 210 million. 

Here’s what I think the legion of doubters who emerged to lay into the shares, which looked sicker than I would if you forced me to watch one of its exclusive Adam Sandler offerings, missed. 

First off, Netflix had a good explanation for the (relatively) poor numbers and I’m not referring here to its complaints about how difficult it is to produce accurate forecasts.

While lockdowns have clearly boosted the firm’s business, with people stuck in their own homes and looking for entertainment signing up in record numbers up until recently, pandemic-related restrictions have also created havoc with production schedules. 

There’s recently been something of a dearth of hot new content. Love & Monsters has had some love from the critics, quite an achievement for a special effects-laden creature feature, and has been riding high in the top 10s the streamer puts up.

But one film will only get you so far and while it hasn’t exactly been alone, the company is going to continue to be short of new offerings in the short term (so don’t expect much in terms of subscriber growth in the next set of results).

Things should improve in the second half when Netflix expects to crank up the new releases.

True, it could, at that point, find itself competing against “normal life”, or something closer to it, at least if the encouraging signs from Covid vaccination programmes hold up. 

But you may care to remember that Netflix was doing just fine before subscriber numbers got a pandemic-related turbo boost. 

The key passage from the shareholders’ letter, to my mind, relates to churn. While Netflix struggled to attract new subscribers, the existing base stayed put, weathering the price rises that have been imposed in the process. 

“We’re... seeing how much members value Netflix with Q1’21 churn below Q1’20 levels,” the company said. Churn, for the uninitiated, is the rate at which customers depart. 

Part of the reason for that being low is that members appear to value what they’re getting. Netflix reported increased engagement per member household. This is perhaps not a surprise in the midst of the pandemic but very useful to the company all the same because (ugh) “as we improve the service, we can charge a bit more”. 

And there surely are ways that Netflix could improve its service. I’ve previously written about its rubbishy algorithm and how easy it is to miss out on some of the gems lurking in the company’s vast library. There is a reason why almost every entertainment and general interest publication (including this one) runs pieces on what you may have missed.

Address that and Netflix may address the challenge of people having less time, and maybe less inclination, to actively seek out those gems in a post-pandemic world. 

What about competition? Pfah, says Netflix.

‘Love and Monsters’ has had some love from the critics (Netflix)

It may be a little complacent there. Subscribers aren’t completely insensitive to price, despite what it would like Wall Street to believe, and streaming prices are going up across the board.

The company ought to have sufficient content to keep itself at the front of consumers minds if they decide to have a discussion over which of their subscriptions to keep and which to cut. But future comments on churn will merit close attention all the same.

That said, the company’s market penetration is remarkably low especially if you care to consider its cultural clout. Netflix scooped up 36 Oscar nominations this year, making it far and away the front runner even if it the betting would suggest it’s unlikely to retain its poll position when it comes to actual awards. 

It still regularly comes away with its arms full of goings from the various ceremonies, not to mention garlands from critics and (crucially) customers.

Yet it reckons it accounts for under10 per cent of TV screen time in the US, even less in other regions, less still when including mobile devices. 

That would suggest that there’s plenty of room for growth out there and that the 10 per cent fall in the shares on the back of the announcement was somewhat over done. 

Despite what Wall Street seems to think, the streaming boom is far from over. The sector’s juggernaut should have quite a bit longer to roll.