Netflix Analyst Cuts Subscriber Forecast on "Flash in the Pan" 'Cuties' Controversy

Courtesy of Sundance


Wells Fargo's Steven Cahall reduces his third-quarter forecast by 50 percent, citing a likely brief impact in the U.S. and Canada.

Netflix could see its third-quarter streaming subscriber growth hit by the controversy around Cuties, Wells Fargo analyst Steven Cahall wrote in a Tuesday report, cutting his subscriber forecast for the period in half to 2.5 million, with the full impact modelled to come in the U.S. and Canada.

He now forecasts Netflix will lose 2 million U.S. and Canadian subscribers in the quarter ending Wednesday, compared with his previous estimate for a 500,000 gain, arguing that "this region bears the brunt of the Cuties detractors."

But he also emphasized: "We think the current controversy and elevated churn is essentially a flash in the pan for Netflix."

Cahall in his report detailed the math behind his assumptions. "If we are to believe reports, then Netflix faced a short-lived but potentially stark churn uptick in September due to controversy around Cuties," he said. "We think this could weigh more heavily on third-quarter net adds than investors realize so we reduce our estimate for global streaming net adds. … Given how strong Netflix is as a service we’re loathe to get too negative, but our churn analysis does imply some meaningful pressure."

Cahall highlighted that "typical Netflix monthly churn is impressively low at 3.5-4 percent." But he said that reports of YipitData figures, which suggested monthly subscriber churn "might have reached levels that were some eight times August’s churn rate," have "meaningfully" contributed to Netflix's recent stock slide. "If we assume that churn increased five times for a single week due to Cuties, it implies … 28 million deactivations in the third quarter," the analyst calculated.

"We’re not sure that gross adds will be up sequentially given the first and second quarters 2020 likely benefitted from lockdowns and a lack of live content elsewhere," Cahall concluded. "As such, our churn sensitivity analysis suggests negative net adds are a possibility (especially if churn exceeded 5 percent)." But he said he was "not ready to go overboard," but if churn is up and gross adds are down, this is likely to mean that "the third quarter will be modest for subs."

While #CancelNetflix initially trended on Twitter, one recent survey found that the controversy led some subscribers to watch Cuties. A majority of viewers watching the film over the Sept. 18-20 weekend said they did so because of the controversy, according to marketing and research firm Screen Engine/ASI.

The acclaimed French film directed by Maïmouna Doucouré is a coming-of-age story about an 11-year-old girl from a traditional Muslim Senegalese family who tries to fit in by joining a group of young dancers who carry out sexualized routines and post them online. The film became caught up in preelection rhetoric in the U.S. Netflix found itself having to apologize after one of its promotional posters for Cuties was widely criticized for being sexually exploitative. "We're deeply sorry for the inappropriate artwork that we used for Mignonnes/Cuties," the streamer said via its Twitter account. But that didn't stop an online movement in the U.S. to boycott the movie, with members of Congress calling on the French-language title to be removed from Netflix's catalog.