Netflix numbers aren't as bad as expected, but we're still close to the streaming subs peak
Netflix is buying Animal Logic, one of Australia's best known production houses
Welcome to Unmade, kicked off just before dawn on Wednesday in frosty Sisters Beach, Tasmania, just as the quarterly Netflix numbers dropped.
They were perhaps the most widely anticipated set of numbers since Netflix started releasing its paid streaming memberships data a decade ago. Three months ago, the company’s share price crashed when it told the market that for the first time, it expected the number to fall for the quarter by about two million - from 221.64m paid subs to 219.64m. Netflix shares are now worth just a third what they were at the start of the year.
We lean today that in the end, the drop was less than a million - falling by 970,000 to 220.67m. The company is predicting that, thanks to the fourth series of Stranger Things, and the accompanying Kate Bush mania, it will return to modest growth in the current quarter - back up to 221.67m, which would also represent growth on six months before.
Nonetheless, as you’ll see from our table above, it’s starting to look a lot like a plateau.
Australia rarely gets a mention in global updates from the big international players. Today’s report was an exception.
Netflix’s revenue growth was helped along by its performance in Asia Pacific, where it was up 23%, not just by growing subscriber numbers, but also growing the price charged per subscriber. The company flagged its increased revenue per subscriber in Australia and Korea as the key driver.
But there was bigger Australian news than that in the update. Netflix is doubling down on animation by buying Australia’s best known and most celebrated animation and special effects studio, Animal Logic.
As Netflix put it in the update: “Today, we announced that we will be acquiring leading animation studio Animal Logic, with ~800 amazing people mostly in Sydney and Vancouver, which will help us accelerate the development of our animation production capabilities and reinforces our commitment to build a world-class animation studio. We’ve been partnering with Animal Logic for two years now, working on The Magician’s Elephant (directed by Wendy Rogers) and the recently announced The Shrinking of the Treehorns (directed by Ron Howard). Together, we’ll create an animation studio that will produce some of our largest animated feature films.”
Assuming that Animal Logic works exclusively on Netflix content in the future, that will leave a gap in the wider screen production community. Animal Logic has been behind major blockbusters including Happy Feet, The Great Gatsby and The Lego Movie.
Netflix also revealed more information about its two other initiatives which recognise that the company is, after all, subject to the same gravity as other media players. It dropped some hints on how it will address password sharing, and more detail about how it’s new, cheaper ad-supported membership tier will work.
The company published a seperate explainer on its experiments in charging more for password sharing. In Chile, Costa Rica and Peru, Netflix has been charging for an “add an extra member” function. In Argentina, the Dominican Republic, El Salvador, Guatemala, and Honduras, it’s about to trial an “add a home” feature for an extra $2.99 per month.
The direction of travel seems to be that connected TVs on the same IP address will be covered under one membership, along with mobile devices outside the home. But wider sharing with friends and family will gradually become more difficult. The plan will be to persuade more people to pay themselves for what they are already consuming.
The issue was underpinned in PWC’s annual Entertainment & Media Outlook Report which was released this week. According to PWC’s calculations, households are paying for an average of 2.3 streaming subscriptions, but accessing far more thanks to password sharing. For the most part, it’s not quite piracy, but it’s a grey area.
And so to the second initiative. Much of the commentary three months ago, when Netflix said it was ready to cross the advertising rubicon, was around angry subscribers who felt that it would ruin the viewing experience. The plan was always to introduce a new tier - it emphasised that more strongly today. The words in bold below are the only ones to get that treatment in the 15 page Netflix update - the company really wants to clear up that misunderstanding:
“Our lower priced advertising-supported offering will complement our existing plans, which will remain ad-free. Our global ARM has grown at a 5% compound annual rate from 2013 to 2021, so it makes sense now to give consumers a choice for a lower priced option with advertisements, if they desire it.
We recently announced Microsoft as our technology and sales partner and we’re targeting to launch this tier around the early part of 2023. They are investing heavily to expand their multi-billion advertising business into premium television video, and we are thrilled to be working with such a strong global partner. We’re excited by the opportunity given the combination of our very engaged audience and high quality content, which we think will attract premium CPMs from brand advertisers.
We’ll likely start in a handful of markets where advertising spend is significant. Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one.
I suspect that given the partnership is with Microsoft, which doesn’t have much of a local sales team, Australia will not be among that initial handful.
The move represents another sign that the pendulum has started to swing back. We just experienced the decade where subscribers became more important than advertisers in funding news mastheads.
An interesting graph in the PWC Outlook suggests we may have crossed that river for television too, as far back as 2018, without noticing it.
As an aide, I wonder whether the PWC estimate for subscription TV revenue (which would also include Foxtel’s broadcast subscribers) may be a tad on the high side. There’s no single source of truth on how much revenue the streamers are bringing in, so that $5bn+ number for subscription TV in 2022 can only be an educated guess.
“Pendulum” was also the word used by News Corp’s global head of transformation Damian Eales, in an interesting interview with Media Week on Monday:
“In the last few years we have seen the pendulum swing from being an ad-funded business – many publishers were 80-90% ad-funded, some publishers in India even higher – to the other direction where many businesses probably stepped too far away from ad revenue.
Some publishers put too much emphasis on digital subscriptions and the pendulum is now swinging back a little. “For the foreseeable future it feels like our industry will be majority consumer-funded, but not to the extent that we don’t also focus on maximising ad revenue.
“If you look at what is happening in streaming now, there is not going to be a one-size-fits-all model. There is a spectrum of monetisation models. The streamers seem to be working out a combination of advertising and subscription will be more common in the future.”
Pendulums eventually get caught by gravity.
Time to let you get on with your Wednesday. It’s a big day for Mumbrella in Sydney today with the return of Mumbrella360 as an in-person event. The best of luck to my former colleagues.
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Have a great day.