Netflix’s business soared during the pandemic, but as it heads into 2021 and faces a potential shortage of films and movies, the company will have to prove it can continue performing.
Netflix reported its third quarter earnings today, and although Netflix is acknowledging slower growth, the company is still adding subscribers. The company added 2.2 million net subscribers in Q3, compared with the company’s 2.5m guidance. The company saw $6.44 billion in revenue, beating expectations. Still, the looming question for co-CEOs Reed Hastings and Ted Sarandos is how they plan to ensure Netflix won’t run out of things to watch.
“The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” Netflix’s letter to shareholders reads. “ In turn, we expect paid net adds are likely to be down year over year in the first half of 2021 as compared to the big spike in paid net adds we experienced in the first half of 2020.”
The biggest advantage Netflix had over its competitors until now was a constant stream of new shows and films. That’s because by the time the pandemic hit, content for Netflix’s 2020 year was largely shot and in post-production, able to be finished remotely. Now, Netflix is about to be in the same boat as its competitors. Hastings and Sarandos have spoken about how difficult getting back into production has been, especially in the United States.
“Netflix was better positioned for this, but it can’t last forever,” Ross Benes, an analyst at eMarketer who covers Netflix, told The Verge. “If you’re going to have Hollywood shut down for nine months, at some point that’s going to catch up to you.”
If subscriber growth continues, Netflix can take that additional revenue and expand its content budget even more. Pivotal Research Group’s Jeff Wlodarczak noted that the more Netflix can reinvest in original programming, the more it “increases the potential target market for their service and reduces existing subscriber churn,” according to The Hollywood Reporter.
Right now, Netflix’s advantages offset its hardships, but that could change. Netflix has a massive subscriber base and a full library, but production woes and a number of canceled series have soured some subscribers. It might not be an issue that Netflix encounters in its next quarter, but it’s certainly a complaint the company will have to address, Benes argued.
Netflix’s recent slate of cancellations — Glow, Teenage Bounty Hunters, I Am Not Okay With This, and The Society to name a few — and executive shake-ups have led to questions about Netflix’s future strategy. Cutting down on expensive shows that don’t bring in or keep subscribers is a good financial move, but it also cuts down on the number of originals that Netflix can offer down the road.
“For our 2021 slate, we continue to expect the number of Netflix originals launched on our service to be up year over year in each quarter of 2021 and we’re confident that we’ll have an exciting range of programming for our members, particularly relative to other entertainment service options,” the letter to shareholders reads.
If production remains difficult to kick-start at the pace Netflix needs (although Netflix’s letter states things are getting a little better), and licensing shows from other networks becomes more difficult due to increased competition, Netflix may have to delay shows and films in order to maintain having new material that does land — like new seasons of The Crown, Stranger Things, The Witcher, and big movies on a regular basis.
“The cancellation of GLOW will not be unique,” Benes said. “We’ll see more of that in coming months. They have a lot of shows that have big budgets and a niche audience. Those shows are all risk. It’s too expensive.”
It’s a bit of a double-edged sword: the company needs as many series and films as possible to compete, but those shows need to retain subscribers and cost needs to remain relatively low. If the company hits a slow period in subscriber growth while also dealing with myriad issues brought on by the pandemic, Netflix needs to find other ways to increase its income to continue spending the way the team does.
One easy and anticipated answer, Benes says, is a price hike. Netflix already introduced a price hike in Canada this month, and that’s a good sign subscribers in the US should prepare, too. Benes believes that Netflix is still underpriced as a service, adding that people get “a lot of value for not a whole lot of money.” It’s a good time for Netflix to ask people for an extra dollar a month, Benes said, because they’ll probably pay. “Some people might cancel, but I bet it would pay off for them,” Benes added.
A leaner slate in 2021 isn’t necessarily bad for Netflix. The streamer will probably still have more new original programming than its competitors, but with major streaming services like Disney Plus and HBO Max finding momentum, it feels like the first time Netflix has true competition in the streaming space. Disney announced a public reorganization to shift its primary focus to streaming; HBO Max and Peacock are gunning for some of Netflix’s subscribers; Amazon Prime Video continues to grow, and people are still spending a bunch of time watching free videos on YouTube and Twitch.
It’s not going to be easy; Netflix has more competition than ever, and that means finding ways to continue delivering, even as doing just that becomes tougher and tougher.