This analysis was first published in SvD Näringsliv, in Swedish, on January 20th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Strong subscriber numbers lifted Netflix after its earnings report. But the effects of its cheaper, more mainstream content have not yet arrived. And a bigger problem has emerged: Disney.
It is easy to be confident when your company is growing fast.
Netflix’s outgoing CEO Reed Hastings said the following in an interview after presenting quarterly results almost exactly three years ago: “We want to be the safe haven where you can explore, be stimulated, have fun, enjoy, relax — and without any of the controversy around exploiting users with advertising.” He added that “in the long run, there is no easy money to be found there.”
Fast forward to Thursday evening and Netflix is in a very different position.
Hastings, who co-founded the streaming giant in 1997, is stepping down as CEO and moving to the role of chairman. He was wrong about never introducing advertising — Netflix launched an ad-supported tier in November 2022. But he was right that there was no easy money to be found. Thursday’s quarterly results showed that all money is quite difficult at the moment: revenues were the lowest of the year, growth slowed to 1.9 percent, and profitability was weak, partly due to the strong dollar.
The subscriber numbers told a different story, however. Analysts had expected 4.57 million new subscribers; Netflix brought in 7.66 million. Wall Street cheered.
How subscribers split between price plans has not yet been disclosed. But even before the report, there were signs the new ad-supported model was not an immediate hit. Data from analytics firm Antenna showed in December that the ad-supported tier was the least popular of Netflix’s offerings — only 9 percent of new sign-ups chose it. The equivalent figure for Disney-owned Hulu is 57 percent. Netflix offered no further details in its report, only noting that it was “early” to evaluate and that they were “satisfied.”
Disney has become an increasingly significant concern for Netflix. Last summer, Disney surpassed Netflix in total subscribers across its streaming portfolio. Disney+ is the largest, available in Sweden and elsewhere, but the portfolio also includes Hulu, sports channel ESPN+ and Latin American service Star+.
Growing at Disney’s pace is expensive, however — the company lost $1.5 billion in streaming last quarter. One area being speculated about is gaming. Disney has circled that sector before. Now they could potentially add games to Disney+.
Netflix is pursuing a similar strategy. They already offer more than 40 mobile games to subscribers and have acquired six game studios. The logic behind the gaming push can be summed up in two words: high interest rates.
“When borrowing was cheap, you could borrow lots of money and invest it in content,” said Shahid Khan, global media head at consulting firm Arthur D. Little, to Reuters. “Given current interest rate levels, Netflix will need to be very selective about approving new content — and how to finance it.”
Film and TV were cheap to produce when rates were low. Now they are considerably more expensive, which affects the type of content Netflix commissions. That means cheaper and more mainstream series going forward. Gaming, by comparison, can be a lower-cost way to keep subscribers engaged — and a hedge against expensive prestige production.
The subscriber figures in the latest quarter show that Netflix’s pull still exists. But the content being watched now was commissioned and financed long ago — TV production cycles are long. The acclaimed war film All Quiet on the Western Front, recently nominated for 14 BAFTA awards, is a clear example of the old, premium model.
When the new, cheaper material starts dominating the screen, we will see whether subscribers prove equally loyal.
