Streaming giant Netflix plans for its high profile third season

Credit: Original article can be found here

As lockdowns loomed last year, people scrambled to stock up on home-survival essentials: food, medicine and a Netflix subscription.

In the first half of 2020 the streaming company registered 25 million new members worldwide, twice as many as had signed up in the same period a year earlier.

Anya Taylor-Joy in a scene from Netflix's The Queen's Gambit mini-series.

Phil Bray/Netflix/AP

Anya Taylor-Joy in a scene from Netflix’s The Queen’s Gambit mini-series.

With viewers hunkering down to see out the pandemic on the sofa, Outbreak, a disaster movie from 1995, made Netflix’s top ten.

Now as many of the world’s economies are reopening, Netflix’s growth is sputtering.

READ MORE:
* Video games coming to Netflix? Latest hiring offers a clue
* Is Netflix’s Play Something feature a goofy novelty or the future of streaming?
* The platforms posing a threat to Netflix’s streaming dominance
* Give us The Crown: New Zealand has some of the highest Netflix viewing hours in the world

On July 20 the company announced that 1.5 million people had signed up in the second quarter of 2021, 85 per cent fewer than a year ago.

In America and Canada, where the market is saturated and competitors are multiplying, the total number of subscribers fell by 430,000. Netflix’s share price, which soared by nearly 50 per cent in the first half of 2020, has barely risen in the past year.

The stall is unsurprising. Many new members from 2020 simply pulled forward subscriptions they would have made later.

It still raises a difficult long-term question for Netflix.

The company began by renting DVDs by mail. Its second, stunning act was to invent and dominate subscription video-streaming. Now, as rich markets mature and rivals snap at its heels, growth must come from elsewhere. Netflix’s third season promises exotic new locations and, perhaps, a big plot twist.

Netflix plans to vary its revenue stream.

Getty/Thiago Prudencio/SOPA Images/LightRocket

Netflix plans to vary its revenue stream.

Season two has a little way to run. Though new subscriptions in America have slowed to a trickle, Netflix has scope to charge viewers more.

It makes an industry-leading US$14.88 monthly from each American member, more than double the takings of Disney+, its main rival, according to MoffettNathanson, a firm of analysts.

Despite this fewer members quit Netflix each month than ditch other streamers, according to Antenna, a data company. Further price hikes could lift Netflix’s domestic revenues by 7 per cent annually for the next few years, reckons MoffettNathanson.

The bulk of the growth, however, will come from overseas. Last year, for the first time, more than half of Netflix’s revenues were earned outside America and Canada. By 2025 the share is expected to reach two-thirds. Already nine out of ten new subscribers live abroad.

The international game is hard. The average American home still shells out upwards of US$80 a month for cable, so those who “cut the cord” can afford half a dozen streaming services. Europeans are stingier: the average British household spends less than US$40 on pay-TV.

Netflix has resisted lowering prices, so even in low-income India a standard subscription costs US$8.70 a month. Its biggest concession has been to invent a mobile-only plan, now in more than 70 markets. Indians can sign up to this for US$2.70.

Netflix series Sex Education.

Netflix

Netflix series Sex Education.

Like the financial barrier, cultural ones are high in show business. Enders Analysis, a research firm, found that programmes made by British broadcasters were richer in local idiom than those commissioned by foreign streamers. Sex Education, a Netflix series set in rural England, had fewer than five British references per hour.

Peep Show, a home-grown hit, had more than 35, from “johnnies” (condoms) to Findus Crispy Pancakes, a national delicacy.

Reed Hastings, Netflix’s boss, said in April that the firm was “still figuring things out” in India, where several senior executives have quit and where rivals like Amazon, an e-commerce giant with a streaming business, and Disney+ have made some headway.

On the strength of this international onslaught, Netflix’s overall revenues will grow by about 14 per cent a year until 2025, calculates MoffettNathanson. The firm is raking in an extra US$5 billion or so each year. This compares favourably with show-business rivals, insiders note.

Yet some investors benchmark the company not against the entertainment industry but against big tech. That comparison is less flattering. Share prices of America’s tech giants, Facebook, Amazon, Apple, Google and Microsoft, have continued to appreciate even as the pandemic burns out. And their revenue growth to 2025 is expected to be nearer 20 per cent a year.

To match them, Netflix needs to think outside the goggle box – not least because, as Matthew Ball, a media venture-capitalist, puts it, consumers are increasingly asking not “What should we watch?”, to which Netflix has become the stock response, but “What should we do?”

The answer, for many, is video games. The industry already generates nearly $180b a year in global revenues and is expanding fast.

PwC, a consultancy, estimates that gaming’s share of global entertainment-media revenues has risen from 15 per cent in 2019 to 19 per cent this year. In America, under-25s already rank gaming as their favourite pastime (and place watching TV shows and films last).

Hastings has long posited that in the attention economy Netflix competes with Fortnite, a popular online multiplayer game, as much as it does with HBO. Until now, though, his firm fought for consumers’ attention with its shows (and, more recently, merchandise sales, live events and podcasts aimed at spurring engagement with its content).

Now it is taking the fight directly to the game developers. Under a new gaming boss nabbed from Facebook, Mike Verdu, Netflix plans to offer subscribers video games on its mobile app within a year. One person with knowledge of the project says the initial investment is a single-digit percentage of Netflix’s US$17b annual content budget, with hopes that this will grow.

Fortnite made more than US$9b (NZ$12.5b) between 2018 and 2019.

LightRocket/SOPA Images/Getty Images

Fortnite made more than US$9b (NZ$12.5b) between 2018 and 2019.

Other media and tech giants have tried and failed to crack gaming, whose interactive nature requires a different technical infrastructure to passive, one-way video-streaming. Disney has closed its games studio.

Google and Amazon have struggled to drum up interest in their respective game-streaming services, Stadia and Luna. It is unclear how Netflix plans to get around Apple’s ban on gaming platforms in its app store. And whereas many hits like Fortnite make money through in-game microtransactions (paying for power-ups and so on), Netflix plans to include games as part of its subscription, a model with few successful examples.

These difficulties mean that many suspect an acquisition is on the cards. “Games are like pharmaceutical companies, you need to spend years building or buying a pipeline,” says one gaming-industry veteran.

Though Netflix has hitherto preferred to grow organically, it has the means to splash out. It generated free cashflow last year and will generate more as its content-spending binge flattens out. Its stable subscription business means it can safely take on debt.

Netflix’s Black Mirror: Bandersnatch allowed viewers to make decisions about the plot direction.

Screengrab

Netflix’s Black Mirror: Bandersnatch allowed viewers to make decisions about the plot direction.

America’s biggest game publisher, Activision-Blizzard, has a market capitalisation of around US$70b, making it a “doable” target for Netflix, which is worth US$237b, believes one of the streamer’s investors. Others speculate about a deal with Microsoft, which has both cloud-gaming technology and a games studio.

The step from video to games is a big one – too big for a company that has grown cosy in its streaming comfort zone, some former Netflixers believe.

“It is now much more of a traditional entertainment company,” laments one, adding that its risk-taking culture works less well at a behemoth with 9000 employees than it did for a startup with a few hundred people. But that still makes it more nimble than the tech giants, with workforces in the hundreds of thousands and more rigid bureaucracies, notes a shareholder.

And the move into gaming may not be as big as the transition from the postal service to the internet, which Netflix pulled off with aplomb. Searching for a cinematic analogy to describe the company, the share-owning optimist settles on a classic from 1953: The Wild One.

© 2020 The Economist Newspaper Limited. All rights reserved. From The Economist published under licence. The original article can be found on www.economist.com