20 JUL 2021

NETFLIX MISSES GROWTH AND EARNINGS OUTLOOK FOR Q2 2021

The streaming giant added only 1.54 million new subscribers during the second quarter of 2021, coming in well below what Wall Street analysts had expected.

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Streaming giant Netflix added only 1.54 million new subscribers during the second quarter of 2021, coming in well below what Wall Street analysts had expected, according to the company’s Q2 financial report on Tuesday afternoon. Overall, Netflix now has 209.18 million subscribers globally. The 1.54 million new subscribers set far from the 12 million new subscribers the company added during the same time frame last year when Netflix was adding customers at a record rate due largely to the COVID-19 pandemic. Netflix also reported $7.34 billion in Q2 revenue, matching what analysts had projected, while its $2.97 earnings per share came in about 20 cents below Wall Street’s goal for the company.

“The pandemic has created unusual choppiness in our growth and distorts year-over-year comparisons as acquisition and engagement per member household spiked in the early months of COVID,” Netflix said in its letter to shareholders. “In Q2’21, our engagement per member household was, as expected, down vs. those unprecedented levels but was still up 17% compared with a more comparable Q2’19. If we achieve our forecast, we will have added more than 54 million paid net adds over the past 24 months or 27 million on an annualized basis over that time period, which is consistent with our pre-COVID annual rate of net additions".

These results could suggest that the typically Gen-Z and Gen-Y focused Netflix will look to older consumers as its next major area for growth. With most young people either already having a subscription, being in a household with a subscriber, or sharing a password with friends and family, there is little room for growth“Netflix has become a victim of its own success. It is so mass-market in many of the more established territories that it has largely signed up all the young audiences already,”  Richard Broughton, Media Analyst at Ampere Analysis, told The Guardian.

Last year, the company registered a record increase of 37 million subscribers, which allowed it to reach 200 million internationally. This huge and unexpected growth would not have occurred had it not been for the pandemic and lockdown restrictions, which explains why this quarter's results are so low.

Moreover, Parrot Analytics data revealed the streaming giant’s share of digital original audience demand has also sunk to record lows, dropping to 48.3% globally and just 46% in the United States during the second quarter of 2021. This is the first quarter Parrot has ever measured, showing Netflix’s digital original demand share below 50% globally. According to Parrot, these latest numbers follow a steady trend of shrinking dominance for Netflix in the industry, spurred on by the launches of Disney+ and Apple TV+ in November 2019. Together with HBO Max, Paramount+, and more, these platforms continue to establish themselves with consumers and grow their subscriptions numbers by releasing highly in-demand original content.

Furthermore, Netflix has struggled to push out breakthrough original content in the last few quarters - except for season three of “Cobra Kai” - and likely will not have another massive original hit until the last quarter of the year, with season two of “The Witcher".

THE GAMING BET
Netflix offered its first on-the-record comments about its expansion into gaming. The biggest news is that the streaming giant will include its videogames as part of its customers’ monthly subscription. Potential games will be included in Netflix subscriptions at no additional cost, the company said. Initially, the focus will be on mobile games. “We view gaming as another new content category for us, similar to our expansion into original films, animation, and unscripted TV. Games will be included in members’ Netflix subscription at no additional cost similar to films and series,” the company said in its quarterly letter to investors. “Initially, we’ll be primarily focused on games for mobile devices. We’re excited as ever about our movies and TV series offering, and we expect a long runway of increasing investment and growth across all of our existing content categories. Still, since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games”.

The company recently hired video-game executive Mike Verdu from Facebook, where he was vice president of augmented reality and virtual reality content. The company makes a deeper push into gaming. With the slowdown in subscriber growth, Netflix has stepped up initiatives to cultivate additional revenue streams, including merchandise, live events, and potentially VR content.

Netflix identified new rivals in its Q2 letter, including TikTok, but said its main competitor is “ourselves” as it works to improve the service. The company has always broadly defined its competitive set. “In the race to entertain consumers around the world, we continue to compete for screen time with a broad set of firms like YouTube, Epic Games, and TikTok (to name just a few). But, we are mostly competing with ourselves to improve our service as fast as we can. If we can do that, we’re confident we can maintain our strong position and continue to grow nicely as we have been over the past two-plus decades.”

Citing recent industry consolidation, including the planned merger of WarnerMedia and Discovery and Amazon’s bid for MGM, Netflix said in the shareholder letter that it doesn’t believe the M&A activity has affected its growth much, “if at all”. Netflix said that it had not identified any “compelling” merger of acquisition targets. “While we are continually evaluating opportunities, we don’t view any assets as ‘must-have,’ and we haven’t yet found any large-scale ones to be sufficiently compelling to act upon,” the company said.