In a crucial moment for the future of streaming and the entertainment industry, Netflix is set to announce its earnings after market close on today. The timing is particularly intriguing as the company faces significant internal changes and external challenges that could shape its trajectory.
One notable development was Netflix’s recent crackdown on password sharing, giving users the ultimatum to subscribe individually or face limited access to content. This move proved successful, with the company experiencing its highest single-day subscriber increases in four years. Analysts expressed optimism about the initiative, which contributed to the anticipation surrounding the upcoming earnings report.
Adding to the industry’s complexity, the Screen Actors Guild joined the Writers Guild of America in a strike, marking Hollywood’s first double strike in over six decades. As Netflix unveils its financial performance, it does so during a period when the entertainment landscape is shrouded in uncertainty. The earnings report will shed light on the company’s internal shifts, such as its decision to introduce ads after previously stating they would never be part of its platform. Additionally, the expansion of the password crackdown to the United States, following a successful pilot abroad, will be examined closely.
At the heart of the dispute between studios, streamers, and the striking unions are residual payments for shows on streaming platforms. Previously, writers and actors relied on ongoing compensation for their work, even after the shows were completed. Netflix has faced criticism for disrupting this long-standing model, with reports of actors from its hit show “Orange is the New Black” receiving minimal residual payments.
Despite the challenges facing the entertainment sector, Netflix is believed to be better positioned than its competitors. Paul Meeks, a portfolio manager at Independent Solutions Wealth Management, suggests that Netflix’s ability to produce content abroad may insulate it from work stoppages in the United States.
Meeks expects Netflix to meet or surpass analysts’ expectations, particularly in terms of revenue, earnings per share, and net new subscribers—the latter being a significant metric for growth. The company’s recent initiatives, including the password sharing rules and the introduction of an ad-supported tier, aim to boost overall subscriptions following lackluster growth during the pandemic-induced surge. Analysts anticipate a net increase of approximately 2 million subscribers in the current quarter, up from 1.75 million in the previous quarter.
Apart from guidance regarding the potential impact of the dual strikes, analysts eagerly await insights into subscribers’ response to the new ad-supported offering, priced at $6.99. Specifically, they seek growth rates and a clearer understanding of cannibalization rates within this new tier.
Furthermore, the financial consequences of the password crackdown are of great interest. This quarter’s earnings report will provide initial insights into the success of the policy implementation, including any initial wave of cancellations and the subsequent rebound in subscriptions and revenues. Analysts suggest that the effects of the crackdown may persist into early 2024.
Meeks acknowledges that the ad-supported tier and password sharing policy represent significant changes to Netflix’s business model. However, he does not view these shifts negatively, noting that such transformative events tend to result in a temporary discount on the company’s stock. He cites previous instances of Netflix’s record subscriber loss in Q2 2022 and the decision to discontinue its DVD business as examples. Despite these challenges, Netflix’s stock currently trades at its highest point since January 2022.
The ongoing industrywide changes have the potential to disrupt Netflix’s business plans, with historical evidence indicating that when setbacks occur, they tend to have a profound impact on the company’s stock performance.
As Netflix prepares to disclose its earnings, the market eagerly awaits the outcomes that will provide crucial insights into the company’s performance and its ability to navigate the evolving streaming landscape amidst the current upheavals in Hollywood.
Source: Fortune
