When Netflix announced on April 19 that it had, for the first time in a decade, not added subscribers, but actually lost 200,000 of them, hell broke loose. Its shares, which had gradually retreated since its November peak of $700, slumped 37 per cent within hours and kept falling since. At the time of writing, Netflix is worth $190 per share, a drop of 72 per cent in less than half a year. This happened regardless of the fact that Netflix did finally manage to turn in a profit.
How could a change in subscriber numbers of 0.11 per cent, a mere rounding error as John Authors of Bloomberg had put it, have triggered such a stupendous fall from grace? Pundits and financial analysts have come up with a long list of possible reasons, many of them grounded in sound, commercial calculation. Yet, the share price collapse of Netflix also reflects the pessimistic mood of our time.
Stock market valuations, of tech shares particularly, were for too long supported by inventive narratives and negligible interest rates. They were priced at earnings multiples which implied uninterrupted, exponential growth for generations to come.
Old hands like Warren Buffet, at 91 by any measure the world’s most experienced stock market investor, had for years bemoaned the impossibility to find investable value in an overpriced market. Now, the economic landscape is changing. After 40 years of expanding trade and falling interest rates, geopolitical confrontation has replaced productive cooperation expensively. Globalisation went into reverse.
Netflix, and the ever-growing freedom of private viewing, would have been unimaginable in our childhood. Films were the sole privilege of cinema theatres. When pictures entered our homes, often adapted to shorter TV formats, they were scheduled according to state-employed programmers, in the beginning only for a few hours per day. As children, we were glued for hours to the test picture, impatient for Lassie, Flipper or Bonanza to start. What a far cry from binge-watching a whole season of House of Cards, 13 episodes in one bleary-eyed night.
Netflix, and the ever-growing freedom of private viewing, would have been unimaginable in our childhood. Films were the sole privilege of cinema theatres
Netflix, founded in 1997, started, like Blockbuster, as a DVD rental – first per DVD, then for a monthly subscription. It actually wanted to sell out to Blockbuster in 2000, for $50m, a modest price when compared even to today’s shrunk market cap of $75bn. It went public in May 2002, with an IPO price of $15 per share. In 2007 it started its streaming business, offering programmes per internet; first in the US, and then internationally, starting in Canada, the UK and Ireland. Its big breakthrough came when the US Federal Communication Commission ruled that cable TV and telephone companies had no right to deny Netflix access to its networks.
In 2013 came House of Cards, watched by millions of viewers all over the world. It was the first time the streaming service provider created content itself, independent from Hollywood and the big TV stations. Awash with cash, Netflix produced one blockbuster after the other, bringing fear to the traditional producers of entertainment content, like Universal, Warner Brothers or Columbia pictures. In 2017, Netflix had for the first time more viewers than all cable producers combined.
The success of Netflix was first envied and then copied. Others started to offer streaming services too. Amazon, the cloud services host of Netflix, started Amazon Prime Video (175m subscribers), Disney offered Disney+ (130m subscribers), Universal launched NBC Universal Peacock; then came Paramount Plus, Discovery HBO Max – all hard on the incumbent heels of Netflix, with 220m subscribers worldwide.
The scramble for subscribers was fought on the price front. Netflix, used to raise subscription prices with impunity, started to look expensive, and could hardly compete with the likes of Amazon Prime for which streaming was a gimmick rather than a pillar of its business. The streaming market became smaller with every new contender and ever more competitive. CNN had to quit after a mere month.
The arms race for ever more expensive content – the essential bait for new subscribers – started to favour cash-rich companies relying on other lucrative income streams. This year, streamer Apple TV+ won the Oscar for best film with CODA. Traditional content producers were cheaply leaning back on existing film libraries, while others like Sony decided that instead of competing with streamers, it might be wiser to supply them with good films. This was dubbed the ‘arms dealer’ approach, which sounds rather inappropriate when we have a real war waged in Europe.
There’s never a way to guarantee a box office hit. It is in the end a symbiosis of talent, sixth sense and happenstance
The determination of Netflix to raise ever more cash to produce successful content is seen by analysts as an unwinnable rat race, which would inhibit sustainable profitability. I’d wish to add that there’s never a way to guarantee a box office hit. It is in the end a symbiosis of talent, sixth sense and happenstance. It is never really correlated to the amount of money thrown at completing the shooting. This is why private equity buys existing entertainment libraries and why film studios focus on sequels.
Pundits bemoaning the fall of Netflix from shareholder grace tend to focus on the business model. Competitors narrow the market; ad-supported streaming services, refused for long and now envisaged by Netflix in its discomposure, would create additional income, as do merchandise, games and super app development. Binge watching, the unique selling proposition of Netflix, might endanger customer loyalty, which would be better achieved by spreading episodes over longer time periods. Algorithms should better focus on narrowing an often bewildering choice.
This is all well, but the biggest headwind all streaming services have to brave now is that the time of hanging out at home binge watching and gaming, while being shut out of the real world by COVID-induced lockdown measures and quarantine, is over. This is compounded by a never experienced cost of living crisis, where inflation is eating up furlough savings and salary rises no matter how generous. Households have to decide now what expenditure they can cut back. And families will easily agree that often multiple streaming subscriptions are dispensable.
Netflix was a clear COVID winner and, as the pandemic is losing its threat, a slowdown of viewer numbers was to be expected. What compounded its stock market punishment is the broader market picture. Interest rates are rising, liquidity is withdrawn and earnings multiples are therefore coming down. Investors seem to be shocked how far they had bid up P/E multiples of their stock market darlings and seem happy to correct themselves when they can point at reasons other than their own exuberance. What we see at Netflix will happen to many other shares.
Nevertheless, I have decided to buy Netflix stock last month. One could say that I was trying to catch a falling knife: I bought at $199; with shares selling for $190 at the time of writing, I am already five per cent in the red. I look very foolish indeed. My stubborn reasoning was that Netflix has reinvented itself quite a few times in the past. And with an ever-escalating war at our door, we may soon wish to withdraw from dire daily news and hardship, consuming blissful entertainment instead. We have seen this happening in the 1920s when film kitsch and romance thrived.
Netflix was a clear COVID winner and, as the pandemic is losing its threat, a slowdown of viewer numbers was to be expected. What compounded its stock market punishment is the broader market picture
It is obvious that I made an ill-timed move. The stock market will turn much worse before it gets better. With nationalisms, partisanship, cancel culture and state interference thriving, the international (and domestic) ambitions of Netflix are at risk. Could anyone explain to me why I decided to sink good money into this company?
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com