It was no surprise when Netflix stock plummeted after last week’s first-quarter earnings came back about 2 million lighter on subscriber additions than the company had projected. But what may come as some surprise is that Netflix’s value has continued to drag one week later. Regardless, the slump looks less like a setback for the high-flying streaming service than an invitation to a buying opportunity for investors looking for a less expensive way into the stock.
There’s certainly no reason for anyone in Los Gatos, Calif., to panic; in all likelihood the stock will pop back up sooner than later. If there are any Netflix bears left, they’re in hibernation because this company has established quite a track record for defying naysayers.
Perhaps what’s spooking investors right now is all the new competition facing Netflix. Kantar Entertainment on Demand’s estimation of market share for new subscribers among the subscription streaming services for the first three months of the year found Netflix running sixth, with Paramount+ and Discovery+ making their first appearance in the data in the most recent quarter.
Netflix’s low finish isn’t entirely unexpected considering it has been around the longest by a long shot, but what’s even more interesting is Netflix was the only service that didn’t lose share compared with the three months from the prior year.
If co-CEO Reed Hastings is sweating the competition, he sure wasn’t showing it on the company quarterly video for analysts last week. Commenting on the underwhelming subscriber figures, he rejected the notion that new market entrants for subscriber dollars was a factor that could be driving the decline.
“There’s no real change that we can detect in the competitive environment,” he said, citing linear TV and YouTube as Netflix’s bigger concerns.
It’s not the kind of thing you would expect Netflix to be saying at a time when its number of direct competitors has ramped up dramatically across 2020, with the latest additions to the category, Paramount+ and Discovery+, having just bowed in recent months. And its most formidable new challenger, Disney+, had grown at an astonishingly rapid trajectory over 2020.
What’s more, HBO Max, another competitor that debuted earlier the previous year, had just taken a bold step forward by streaming first-run movies from parent company WarnerMedia the same day they premiered in theaters.
But none of that impacted Netflix’s ability to add subscribers?
Hastings certainly has ulterior motives for playing down the impact of his competitors. But it’s also possible this is truly how he sees his competitive set — so small at this stage he just verbally swats them away like mosquitoes. It’s possible Hastings doesn’t have much regard for others in the category, though that’s hard to believe given how lavishly he has recently praised Disney for its success with Disney+.
The simple mistake one can make with sizing up the streaming field is to look at it as a zero-sum game, where one streaming service’s gain is another’s loss. It’s entirely possible, for instance, that the first waves of subscribers coming to the newer streaming services are already Netflix subscribers, and one doesn’t mean churn from the other.
Netflix’s Q1 churn levels actually decreased versus last year, which is impressive at a time when the ease with which streaming services enable customers to turn their subscriptions off and on is going to come back to haunt them. In its 15th annual “Digital Media Trends” survey, out last week, consulting firm Deloitte found the rate of churn among streaming services nearly tripled between May 2020 and February 2021.
Hastings’ comment brought to mind another characterization of competition that turned out to be profoundly false, one for which Netflix was on the receiving end from an earlier incarnation of one of its current rivals. Just over a decade ago, Time Warner CEO Jeff Bewkes dismissed Netflix as a potential threat to media companies like his own with what turned out be a misguidedness of epic proportions.
“Is the Albanian army going to take over the world? I don’t think so,” he told The New York Times.
Fast-forward to 2021, and Netflix’s world domination is already old news. You can’t help but wonder if the view from the top that clouded Bewkes’ judgment back then is affecting Hastings the same way now that it’s his turn to rule the media roost. This from a guy who once described his company’s greatest threat as sleep, which puts a ceiling on the amount of binge viewing its subscribers can do.
Is there one streaming service that’s going to rise up and overtake Netflix anytime soon? Of course not. But Hastings has to consider that all these new challengers in aggregate could take its toll on Netflix. Maybe he would have been more prudent to downplay the competition but also acknowledge their growth potential.