Netflix Had a Rather Successful Q2 But Big Challenges Are on the Horizon

Putting aside the impact of the two Hollywood strikes which have already led to a rescheduling of the Emmy Awards and numerous release date changes for 2023 and 2024, there is no question that the streaming world was already in a state of flux this year. Sony might be the only studio that doesn’t look foolish when the smoke clears. Netflix has faced its fair share of challenges over the past 3 years and whilst Q3 2023 was a very good one for the platform — storm clouds might be brewing.

Paid Sharing: Netflix has had a successful launch of its paid sharing in 100+ countries, which cracked down on password sharing. This represents over 80% of Netflix’s revenue base. Revenue in each region is now higher than pre-launch, with sign-ups already exceeding cancellations.

Paid Net Additions: Paid Net additions were 5.9M in Q2. Netflix is in the process of increasing that number by rolling out paid sharing to almost all of the remaining countries in which the streaming service is available. 

Revenue and Profit: Netflix Q2 2023 revenue of $8.2B and an operating profit of $1.8B were generally in-line with Netflix’s forecast. Revenue growth is expected to continue in the second half of 2023 as the full impact of paid sharing plus and its Standard with Ads plan growth progresses. 

To bolster its Standard with Ads plan, Netflix has started to stop offering its Basic Ad-Free plan. It turns out that the Standard with Ad Plan generated more revenue than the Basic Ad-Free plan. As a result, Netflix dropped its Basic Ad-Free Plan resulting in the following new plan and price structure. 

Current Netflix Plans

Overall, Netflix is targeting a full 2023 operating margin of 18% to 20%.

Netflix Popularity

As measured by Nielsen, Netflix had the top original streaming series in the U.S. for 24 of the first 25 weeks of 2023, and the top movies for 21 weeks.

All this seems to bode well for Netflix, especially in comparison to its big subscriber losses in Q1 and Q2 losses in 2022.

Challenges

However, Netflix (and other streaming services) may be facing new challenges for the rest of 2023.

Competition: The streaming war continues to accelerate. This means that the viewing audience is becoming more fragmented as there is too much to watch and too many services going after the same viewer dollars. Also, it doesn’t help that prices for subscription services keep increasing.  The following table illustrates the change in the competitive streaming landscape from 2021 to 2023.

Production Spending Cutbacks: As a result of both increased competition and the glut of programming trying to find an audience, Netflix is planning to trim its current bloated production budget by as much as $300 million dollars. 

WGA and SAG/Aftra Strikes: Just like their competitors, Netflix has halted production on many show and movie projects, and at some point, the ability to provide new content will be limited as the number of already-completed projects shrinks. However, foreign-based projects are not necessarily affected as they don’t always fall under WGA and SAG-AFTRA jurisdiction.

Also, animation (Anime) projects are not necessarily affected either. With that in mind, Netflix may not be impacted as much as some of its competitors. Also, in the short term, for halted projects, no money is being spent so Netflix is experiencing a temporary cash flow boost. 

AI: The application of AI (Artificial Intelligence) in the show and movie writing and production process is a major fear of WGA and SAG-AFTRA as it has major job replacement implications. For example, Netflix has made a recent announcement in regard to hiring a Product Manager for a Machine Learning Platform (AI) 

The timing of Netflix’s intention to hire an AI Chief doesn’t bode well for negotiations with the WGA and SAG-AFTRA as the AI Genie has been opened across the entertainment industry.

Regardless of when the strikes end, the relationships between the WGA, SAG-AFTRA, and the movie, TV, and streaming studios are not going to be the same as it was before the strikes. 

Progress on the recently announced Netflix Studios at Fort Monmouth has also stalled according to EIC Ian White who lives down the road from the $900 million project that was finalized earlier this year.

For more information: Netflix Q2 2023 Shareholder Letter (pdf) or Netflix Q2 2023 Earnings Interview (YouTube)

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