Editor’s Corner—Netflix has some explaining to do

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During its earnings interview, Netflix will need to offer details on its recent price hikes, its ballooning content budget and the exodus of licensed programming to rivals like Hulu.
Ben Munson

On Monday, Oct. 16, when Netflix fires up its third-quarter YouTube interview—complete with only one analyst asking questions and suspect audio quality—it will expound on its results, which could include another 4.4 million subscribers and a revised outlook on revenue. But the company will also need to offer details on its recent price hikes, its ballooning content budget and the exodus of licensed programming to rivals like Hulu.

Ahead of the earnings call next week, here’s a breakdown of those three elephants in the room and what Netflix might say about them.

Pricing increase

Netflix dropped a bit of a bomb a week ago when word got around that the service was jacking up rates on two of its most popular streaming plans. Netflix is raising the price of its standard service from $9.99 to $10.99 per month, and price of its premium tier from $11.99 to $13.99 per month. The company explained the price bump as something that will have to happen “from time to time” in order to continue providing original programming and updating its service platform.

Last time Netflix raised prices—a jump in 2016 after a grandfathering period—subscriber churn came in higher than expected though not devastating. But that was after prices remained static for a while and that increase was only $1 or $2 after un-grandfathering took effect.

The reflex from this price hike, which is higher at the premium tier and coming only about one year after the previous increase, could be harsher this time around. While it may not result in subscribers leaving in droves, it could prompt customers to scale back from the pricier premium tier.

What Netflix might say: This price increase won’t kick in until well into the fourth quarter, so this quarter’s subscriber numbers will be free from the impact—meaning Netflix can likely save its breath about churn until next quarter. And if analysts like UBS’s Doug Mitchelson are correct, Netflix may get to bask in both a subscriber and a price increase this quarter.

“We would expect gmt.. would be unlikely to implement such a price increase if U.S. subscriber trends were disappointing, bolstering our confidence further,” Mitchelson wrote.

But if the price hike comes back to bite Netflix in its traditional strong fourth-quarter subscriber additions, then the story could change and result in more modest subscriber estimates this quarter.

Content budget

Try as they might, Netflix’s rivals just can’t keep up with the SVOD’s monstrous content budget. As of now, Netflix is earmarking about $7 billion a year for content. Within the streaming video space, its closest competitor is Amazon dropping $4.5 billion. And while competitors like HBO, who dwell in both traditional and streaming TV environments, argue that spending more doesn’t necessarily equal better content, there’s reason to believe that Netflix is finding a balance.

As the Wall Street Journal reported, Amazon continues struggling to find a massive hit and it keeps chasing off content creators by poorly managing productions. Meanwhile, Netflix has continued to foster a community for creators, attracting talent and churning out genuine water-cooler content, giving it the good will to raise its prices again and further sustain the content spending.

“We believe the timing of the subscription price increases is directly tied to the power of content available on Netflix this quarter. Season 2 of Stranger Things hits on October 27 and Season 2 of The Crown hits on December 8 among many other titles,” wrote BTIG analyst Rich Greenfield in a research note.

What Netflix might say: Traditionally, the chief financial officer is the most fiscally responsible of any group of executives on a corporate earnings call. But last month, Netflix CFO David Wells straight up said that his company could produce a $20 million per hour TV show. For context, HBO’s “Game of Thrones,” with its digital dragons, exotic shooting locales, and massive cast and crew, will run $15 million per episode during its final season.

If the CFO says $20 million per hour of TV is doable, there’s no reason to think the rest of the team stay all in on Netflix’s staggering content budget.

Content exodus

As Netflix’s original content catalog grows to the point where you haven’t heard of half the originals that pop up while browsing the service, well-established programming with built-in fan bases is exiting the service en masse. Disney’s decision to pull its films in 2019 in order to package them in a new proprietary streaming service got a lot of press, but huge shows like “This Is Us” and beloved old series like “How I Met Your Mother” have been heading to Hulu instead of Netflix.

Industry analyst Michael Nathanson said 21st Century Fox shows—which have been moving to Hulu and ad-free FX+—represent a bigger blow to Netflix because they hold more Ratings Power. That metric measures IMDB star rating multiplied by the number of IMDB reviews and the number of episodes.

“While the recent moves by the Walt Disney Company to build a direct-to-consumer strategy has garnered all the headlines, the truth is that 21st Century Fox has been the leading contributor to Netflix’s content library,” Nathanson wrote.

What Netflix might say: Netflix was cordial in the wake of Disney’s content announcement, saying the move was a “natural evolution” and something the SVOD expected would happen. No hard feelings.

There’s not much reason to expect that Netflix would start panicking now, even as rival Hulu continues to bulk up and lower its prices (at least for a limited time offer). – Ben | @fiercebrdcstng