Source: Deep Sound

Author: Zu Yang

Netflix became a “friend of time.”

Two years ago, Netflix (Netflix) was at a slump in performance and “forced” to bow down to the advertising business. At the time, there was a lot of doubt in the market. Today, two years later, the number of global subscribers has been growing for seven consecutive quarters, and advertising plans have become a new lever, still leading other streaming media with a Hollywood background.

This morning, Netflix announced its financial results for the first quarter of 2024. All indicators exceeded expectations:

• Achieved revenue of 9.37 billion US dollars, an increase of 14.8% over the previous year, exceeding Netflix's estimate of 9.24 billion US dollars and Wall Street analysts' estimate of 9.28 billion US dollars;

• Operating profit of US$2,633 billion, up 54% year on year, operating margin 28.1%; net profit of US$2,332 billion, up 79% year on year, net profit margin 24.9%;

• Earnings per share of $5.28, also surpassed Netflix's estimate of $4.49 and Wall Street analysts' estimate of $4.54;

• In terms of the number of users, there was a sharp increase of 9.33 million this quarter, exceeding Wall Street's estimate of 4.88 million. Today, the total number of subscribers worldwide is 269.6 million. Among them, the number of ad members increased 65% month-on-month, maintaining a continuous 70% month-on-month increase in the third and fourth quarters of last year.

Now that the situation is improving, Netflix said in its earnings report that it will stop reporting the number of quarterly members and ARM (average monthly membership revenue) from the first quarter of next year, and will only publish data on the number of users that have reached key milestones; at the same time, it will add annual revenue guidelines (including annual operating margin and free cash flow forecasts, as well as quarterly revenue, operating income, net income, and earnings per share forecasts).

Management explained that this change in the data dimension was to focus subsequent business goals on profitability, because of the segmentation of pricing and plans, single user growth and payment conditions also had limited effect on guiding performance.

The stock price fell slightly after the earnings report was released, but in the overall picture, Netflix's stock price has risen 25.4% since 2024, surpassing Disney and Warner Bros. Pivotal Research Group analyst Jeffrey Wlodarczak (Jeffrey Wlodarczak) bluntly stated that “Netflix won the 'streaming war'.”

Pay more attention to “user engagement”

Netflix's decision not to offer new paid subscribers starting next year is actually not difficult to understand. As streaming media matures, the demand for user retention will gradually increase over the number of new users. After the number of members reached the 100 million level on domestic video platforms, the same situation was actually the same. The quality of content was reduced, and more attention was paid to “user participation.”

In its earnings report, Netflix believes “user engagement” (i.e. time spent) is the best measure of customer satisfaction. At the same time, they publish a weekly list of the most popular episodes and a viewing report every two years.

Judging from objective data, Netflix's user engagement is relatively stable and healthy — the browsing time for each account in the first quarter of 2024 was the same as the same period last year. According to Nielsen data, Netflix's share of streaming TV viewing in the US has stabilized at around 7% to 8%.

The key to keeping users engaged is “the ability to consistently deliver quality content.” This has already been verified by domestic video platforms: iQI was able to switch from loss to profit, and the core was to use continuous high-quality content to retain users. It was mentioned in the financial report that it achieved the best annual performance in history in 2023, and core indicators such as total revenue, operating profit, net profit, and cash flow were all the best in history.

Let's take another look at Netflix. In the past Q1, Netflix has a rich and high-quality supply of content. Nielsen's weekly streaming ratings show that since this year, Netflix's streaming movies have ranked first in the first 11 weeks for 8 weeks, and original series for 9 weeks have ranked first in the first 11 weeks.

In terms of dramas, two “prestige dramas” (prestige dramas, refers to the platform's audience series) “Griselda” and “3 Body Problem” were launched. The former is an extra part of the gold signature “Narcos” series, which tells the story of a villain leading lady turning into a drug lord, and has garnered 66.4 million viewers on the site. The latter was adapted from Liu Cixin's sci-fi masterpiece “The Three Bodies,” with Kwon Yu's main creator and an investment of 160 million US dollars, making it the most expensive series in Netflix's history. After it aired, 39.7 million people watched the series. At the same time, the popularity of the series also boosted overseas sales of the original novel “Three Body” and the two books “Silent Spring” mentioned in the drama.

In addition, the British drama “Fool Me Once (Fool Me Once)”, “The Gentlemen (Gentlemen)”, “One Day (One Day)”, and the Korean drama “Queen of Tears” and “The Embarrassment of a Murderer” also had good broadcast data.

In terms of movies, the Spanish film “Society of the Snow (Jedi Pact)” won the 96th Academy Award for Best International Film (nominated) and swept the Spanish Goya Awards with 12 awards. It is the film that has won the most awards in 20 years, and is also the second most popular non-English movie in Netflix's history.

Thanks to the continued appeal of high-quality content to users and effective control of content spending costs, Netflix's profitability increased significantly year-on-year and month-on-month during the quarter: operating profit increased 54% year over year, and net profit increased 79% year over year.

Notably, Netflix's ability to produce quality content matches its global membership. According to financial reports, Netflix has covered nearly 270 million households in more than 190 countries. Each household has about 2 users, covering a total audience of nearly 500 million. As it covers a wider range of countries and regions, Netflix has the ability to promote the internationalization of good local content. In particular, the success of blockbusters such as the Korean drama “Squid Game” and “Dark Glory” shows the sustainability of Netflix's production of blockbusters in the global market.

We have seen that the Netflix version of “Three Body” was recently launched. Despite strong dissatisfaction from fans of the original book in China, the series had a total viewing time of 258.6 million hours over the 18 days of its launch, with a cumulative total of 34.9 million viewers. This week, the drama is still in the Top 10 in 92 countries and regions around the world. According to the latest official data, Netflix's “Three Body” spent 61.3 million hours watching on Netflix in the third week, with 8.3 million viewers, successively topping the list of Netflix series viewers this week. The drama has now been renewed for a second season and is expected to be screened in 2026, which shows its judgment in grasping the tastes of the global market.

More flexible business models

Continuous content production capacity is the core on which streaming platforms are based. Based on this, the platform will have more energy and space to adjust and reform the business model. Today, Netflix has found the “three axes” of business growth: pay-sharing, ad plans, and flexible pricing to boost revenue in a three-pronged manner.

Previously, many users shared streaming accounts, and one person paid for it, and relatives and friends used it. Netflix estimated that about 100 million unpaid users around the world shared it with family and friends, which greatly affected the growth of streaming media revenue. As a result, Netflix has vigorously cracked down on password sharing in developed regions in Europe and the US, and launched a paid sharing option last spring. US users can pay an additional 8 US dollars a month to share their accounts with people outside of their household. This move has also increased Netflix's revenue.

Netflix's pioneering attempt drew other streaming platforms to follow suit. Disney+ will crack down on password sharing in some regions in June and be implemented globally in September; J.B. Perrette (J.B. Perrette), president of Warner Bros. Discovery and CEO of global streaming and gaming, recently announced that its streaming platform Max will follow the example of Netflix and restrict users from sharing accounts with others by the end of 2024.

In order to meet the multiple needs of users in a more segmented manner, Netflix has also launched an advertising subscription plan, where users can watch video content in the form of watching advertisements at a lower price.

The advertising plan was launched for more than a year and has maintained a high growth rate. In the financial report, Netflix mentioned that the number of members subscribing to the advertising package in the first quarter increased 65% month-on-month compared to the fourth quarter of last year (the continuous month-on-month growth rate for the third and fourth quarters of 2023 was 70%), and that more than 40% of registered users in the advertising market came from advertising plans.

The greater value of Netflix's advertising program was reflected in the fact that regions that had originally peaked in growth broke through the ceiling.

By region, North America and Europe, the Middle East, and Africa, which are the main markets for the number of new users this quarter, increased by 2.53 million and 2.92 million respectively, far higher than the same period last year. To some extent, this is related to Netflix banning new users from signing up for the cheapest ad-free basic package and expanding the coverage of advertising packages in developed European and American regions such as the US and the United Kingdom since July last year.

Netflix Co-CEO Greg Peters said that in order to further stimulate users to subscribe to subscription plans that include ads, entry-level basic plans without ads will be completely discontinued in certain markets in Canada and the United Kingdom starting in the second quarter of 2024. In other words, subsequent users can choose the minimum ad-free package of $15.49/month; if they want to be cheaper, only the ad-included package is $11.99/month. Wedbush analyst Michael Pachter predicted that the new members added in the second quarter seemed more likely to choose the ad tier.

In addition to increasing the number of users of the current Netflix advertising plan, the other key is to be able to provide better services to advertisers and expand advertising revenue. Netflix said in its earnings report that it will continue to focus on measurement solutions and establish new partnerships with Kantar and Lucid to increase brand awareness and recall rates. It is expected that advertising revenue in 2025 will strongly support total revenue.

Finally, there is flexible pricing, which increases pricing appropriately as value increases.

For a long time in the past, price increases were Netflix's tried and tested “killer weapon”. Every time the price increase in core regions led to a rise in revenue, an increase in ARPU values, and a rise in stock prices during the season. In October of last year, Netflix raised subscription fees for premium members in the US, UK, and France. By the first quarter of this year, the “price increase effect” became apparent — that is, ARPU values in North America, Europe, the Middle East, and Africa increased.

Coupled with the appeal of low-cost advertising packages to users, Q1 Netflix's core markets in North America, Europe, the Middle East, and Africa achieved both growth in the number of users and ARPU value.

You need not only good content, but also be able to make money

In addition to the obvious situation that can be seen in financial data such as membership and advertising, Netflix is also undergoing some positive changes.

For example, diversify the content and focus on various categories such as sports and games. Netflix executives have publicly stated that “it's more than just a streaming platform,” covering pay TV, movies, games, and brand ads.

In terms of sports, in early 2024, Netflix acquired exclusive broadcasting rights for World Wrestling Entertainment (WWE) Raw and other programs. This is the first time that Netflix has entered the field of live streaming events. Starting in January 2025, platforms in the US, Canada, Latin America, and other international markets will provide 52 weeks of weekly live broadcasts to attract millions of WWE viewers around the world and help with advertising plans. In terms of games, Netflix currently has over 90 games in various stages of development.

Another example is the segmentation of member rights and benefits, using more interesting gameplay and operation methods to increase users' trust and stickiness to the platform.

Engage your audience with a variety of trailers before the series goes live. Netflix revealed that its upcoming series and movie trailers generate more than 6 billion impressions on Netflix every month, which is more than 40 times that of YouTube.

Once the series goes live, features such as “Remind Me (Remind Me)” will immediately alert and notify users, allowing interest to be quickly turned into action, while accurately finding matching users through personalized recommendations. At the same time, Netflix will have conversations with potential users on social platforms based on content types to increase users' sense of participation through creative marketing. According to the data, Netflix generated more than 10 billion organic impressions on social platforms in 2023.

Next Q2, Netflix's “content library” is still adequate. There is the miniseries “Parasite: The Grey Army” based on Japanese comics; the sci-fi suspense drama “The Doomsday Fool” starring Liu Yaren and An Enzhen; and “City Hunter,” an adaptation of the comic of the same name. The day before the earnings report was released, another Netflix blockbuster, “One Hundred Years of Solitude,” released a teaser trailer, and expectations were high.

The release of more popular content also boosted positive revenue guidance. Next quarter, Netflix forecasts revenue of US$9.491 billion, up 15.9% year on year, operating profit of US$2.52 billion, operating margin of 26.6%, net profit of US$2,063 billion, and earnings per share of US$4.68 billion.

The streaming media business is not easy to do. After entering the market, major Hollywood companies are investing in funding, volume technology, and volume copyright in an attempt to win, but in the end, Netflix is still half ahead. The core is the content ability and ability to respond in a timely manner that Netflix has accumulated over a long period of time.

Beginning last quarter, Netflix “shook hands and made peace” with various streaming media to launch copyrighted content produced by other platforms. To a certain extent, this also shows that streaming media competition has reached a certain stage, and “competition” is the right position for long-term development.

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