Industry Insider: A Look Into Netflix’s Q2 2023 Second Quarter Earnings Call

On July 19, 2023, Netflix (NASDAQ:NFLX) hosted its Second Quarter Earnings Call. The two co-CEOs, Ted Sarandos and Greg Peters, met with Bank of America’s Research Division Managing Director Jessica Reif Ehrlich in the usual 30-minute interview format adopted by Netflix. While subscribers number increased well above Wall Street’s expectations, revenues did not: the company’s efforts in changing investors’ perception of its success from subscriber count to revenue could have backfired, as the stock dropped 8% after the news.

The first topic to be tackled was the pressing issue of the ongoing WGA and SAG-AFTRA strikes, and their implications on Netflix’s output in terms of original content. The answers were nebulous, as of course none of the studios can assure anything at the moment, especially in terms of content output. Notably, Sony Pictures just announced massive delays in releases of movies such as Spider-Man: Beyond the Spider-Verse and Kraven the Hunter, which will premiere almost one year later than what was originally announced. These delays, which will probably soon hit all other studios, are due to the fact that striking SAG actors not only are prohibited from filming on any production, but they also cannot promote their projects in any way - meaning that they cannot take part in any interviews, premiers, panels, or the making of promotional content and merchandise. Sarandos highlighted Netflix’s proactive stand on the situation:

“We're super committed to getting to an agreement as soon as possible. One that's equitable and one that enables the industry and everybody in it to move forward into the future.”

Sarandos also discussed extensively one of the most radical strategic decisions that the company has made in the past year: putting an end to password sharing (called “paid sharing” in the letter to shareholders). The strategy had great results, and it developed according to what was predicted: after a first “stalling” period, old “password-sharers”, left without an account, usually purchase either the ad-supported one or the first tier subscription without ads. 

Netflix has launched the password sharing block in more than 100 countries, representing 80% of revenue. The positive rebound of the paid sharing is already visible, as new subscriptions have exceeded cancellations, adding a net 5.9 million subscribers in the second quarter, bringing the global total to 238.4 million - an impressive result considering that the streaming market is plateauing and competition is fierce. Paid sharing, combined with the introduction of the ad-supported plan, also had a positive impact on revenues, with $1.8 billion in operating profit. However, revenues still missed both Wall Street expectations and Netflix’s forecasts, although the company argues that the full extent of the financial impact of paid sharing and ad-supported plans will be visible in the next quarters.

As the main goal for Netflix is revenue growth, advertisement will play a significant role in its achievement. While paid sharing is a strategy to profit off of untapped membership revenue, ad-supported subscriptions are instead a completely new revenue stream that will reach its full potential as Netflix improves its ad-supporting technology. In fact, the company wants to add advertising features to guarantee a vast (and targeted) reach to its clients, such as giving them access to the Top 10 lists. Spencer Neumann (CFO) in the past stated that ads would contribute to 10% of total revenues, which is still the company’s target, even though right now the membership base for ad-subscriptions is too small to contribute meaningfully to revenues. However, during Q2, Netflix removed the basic ad-free plan from Canada and is planning to do so in the UK and US as well, thus incentivizing subscriptions to the ad-supported one as it becomes the entry-level plan.

On content, Netflix changed the way it reports the success of its titles. The “Most Popular” lists were updated from the famous 28-days-rule to 91 days, and the titles are now ranked by number of views (total hours viewed divided by runtime, thus taking into account the inherent advantage that longer shows would have had otherwise). Moreover, Sarandos has confirmed that Netflix will not license its shows:

“And then almost anywhere else we put it, there's either a crossover and they otherwise have Netflix account or a much smaller viewing base. So we're -- we think we're taking the right course in terms of offering the content to our members and having it around even after its original run on Netflix.”

This is a particularly meaningful stance on the subject, as other streamers have started licensing their original content. For example, HBO’s Insecure is now available on Netflix as well, thus potentially suggesting a return to the original licensing business model that characterized streaming services at their very birth. However, Netflix is not planning on licensing older successes to other streamers or TV broadcasters, especially if it plans to produce more shows under the same IP. In fact, the release of the movie Extraction 2 (2023) made its prequel Extraction 1 (2020) re-enter the Top 10 list, a phenomenon that frequently occurs with the release of new seasons or sequels of well-established shows and movies.