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After the 2008 financial crisis, Congress passed a law that included mandatory “stress tests” for Wall Street banks.
Financial institutions that are subject to the bill are required to run a variety of tests, including “baseline and severely adverse scenarios” that incorporate factors like macroeconomic activity, income, prices and interest rates, among other factors. The purpose of the stress tests, particularly the “severely adverse” hypothetical, is to “assess the strength and resilience of financial institutions,” according to the Treasury Department.
The streaming video business is now undergoing a stress test of its own, but it isn’t a hypothetical.
Netflix’s shocking quarter, in which it lost subscribers for the fist time in more than a decade, has sent a ripple effect throughout the entertainment business. The company’s share price fell by more than 30 percent at the open, analysts downgraded the company in droves, and the company’s own forecasts became even more bearish. Shares in other companies in the space, including Disney and Roku, also fell.
Perhaps that’s why on Netflix’s earnings call Tuesday, one comment from co-CEO Reed Hastings stood out. “I know it’s disappointing for investors, and it is for sure,” Hastings said, adding that the company was now “super focused” on “getting back into our investors’ good graces.”
For the notoriously low-key Hastings, those comments were the equivalent of a five-alarm fire. And it showed in the company’s quarterly report, and in other comments from executives made during the earnings call.
A password-sharing crackdown after a decade of looking the other way? The company is doing it. Cheaper, advertising-supported tiers after insisting for years that the company would never be in the ad business? They are going to happen. “Pulling back” on content spend after increasing it by the billions year after year? Now the company is trying to be “prudent” with where it spends its cash. A Hail Mary bet on video games, while the competition remains focused on TV and movies? Netflix is all-in.
Netflix is throwing everything it has against the wall, hoping that one or more of these moves can get the company back into the “good graces” of investors. But as scary as the moment is for Netflix, it may be even more so for competitors like Disney, Paramount, Warner Bros. Discovery and NBCUniversal, each of which have reorganized and reoriented themselves around streaming video, all in a bid to be just a bit more like Netflix, which for years was the darling of Wall Street.
Now the Street is having second thoughts, and the implications for the rest of the business are enormous. The good news for Disney et al. is that Netflix is the one undergoing the streaming stress test, and it is doing so in a very public, high-profile way.
While most Netflix competitors already have ad-supported tiers, and some may be more aggressive about cracking down on sharing, Netflix’s immense scale will give everyone a look at just how profitable those strategies really are.
But an underappreciated part of Netflix’s earnings was that executives also cited user churn as a critical factor in the earnings miss.
Last month, the consultancy Deloitte released a report that touched on the state of streaming, and “the headline is that churn is here to stay,” Jana Arbanas, vice chair of Deloitte LLP and U.S. telecom, media and entertainment sector leader, told The Hollywood Reporter.
“It wasn’t a one-time bump,” Arbanas added. “Streaming companies are going to have to grapple with this consistent volatility with subscribers.”
Unlike cable TV, streaming services make it easy to quit, and easy to come back. The end result is that once consumers watch what they came for, they can unsubscribe to one service in favor of another, perhaps returning months later when the new season of their favorite show drops. Per Deloitte, younger consumers are particularly comfortable with this proposition.
Services like Disney+ and HBO Max are trying to fight it by releasing new episodes weekly, and staggering releases to keep subscribers engaged, and of course by launching cheaper, ad-supported plans. Netflix has avoided weekly releases, citing user experience, but given all the pivots this quarter (including ads), could such a move be far behind?
And then there’s the data question. Netflix has long prided itself on knowing what consumers want to watch before they watch it. But with all the new competition, is Netflix’s data enough? The company rolling out a new “two thumbs up” option suggests that it thinks there’s more it can do.
“With the amount of data out there around consumer habits — shopping, watching content, music, gaming and leisure — Netflix only has one touchpoint to the consumer,” Andre Swanston, senior vp media and entertainment for TransUnion, tells THR in an email. “Its competitors (Amazon, Disney, etc.) have a better understanding of the consumer’s lifestyle (ecommerce, live events, sports, etc.,) and how to best engage with them.”
It’s just one of many questions facing the streaming business, and while Netflix is living through it now, the questions may as well apply to everyone in the business.
Can streaming advertising work if many higher-income households decline to buy in? Will cracking down on password sharing increase subscribers, or will it push consumers away? How low can the content spend realistically go in such a competitive market?
And perhaps the most alarming question of all, as summarized by Fox Sports executive vp Michael Mulvihill in a tweet last November: “The most fascinating thought exercise in this business is: What if streaming in the US is *already* at or near maturity?”
Mulvihill added in a retweet on Wednesday: “Not just a thought exercise anymore.”
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