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Netflix sees radical changes to business model

by LLB Reporter
20th Apr 22 9:51 am

Signs of trouble have been growing stronger in recent months for Netflix and now we’ve had the full warning that growth is below expectations.

Its reaction? We’ve got the full kitchen sink. Likely pricing changes, the prospect of advertisements when you use its platform and a new strategy to combat sharing account details with friends and family.

That might not be enough. Fundamentally Netflix has been throwing cash at seemingly any production regardless of its quality just to keep its content fresh and ahead of the competition.

“Quantity isn’t necessarily what viewers want; they would rather see a decent programme or film rather than poor quality content which gets switched off after five minutes. Quality over quantity might be a better strategy if it wants to stay ahead of the competition and keep customers loyal,” says Russ Mould, investment director at AJ Bell.

“It looks as if Netflix will have a cheaper subscription tier that will include advertisements. Going down this path was inevitable as some of its core geographic territories became mature in terms of subscription numbers. The cost of creating shows and films continues to go up and Netflix is spending big on marketing to keep its brand in front of consumers, so it needs to think beyond subscription income in terms of money coming through the door.

“Having a lower-priced tier with advertisements creates a few challenges. On one hand it might help to boost new customer numbers, on the other you might see existing subscribers trade down to the cheaper tier to save money.

“One strategy that Netflix could adopt is to restrict its best content to the top tier of subscribers. So, unless you pay the full price, there is a delay before you can see the latest releases.

“The removal of services in Russia resulted in a drop of 700,000 net subscribers. This is surprising on two counts: first that its Russian operations were quite small in the relative scheme of things and second that it lost almost as many subscribers from the US and Canada during the quarter (640,000). The latter is worrying given it spent $556 million on marketing globally in the period and the return on that spending looks very poor with only 500,000 net new subscribers excluding the Russia hit.

“A big problem with Netflix is that it’s too easy to leave the service. Consumers feeling the pinch of inflation will be looking hard at their outgoings and streaming services are an easy place to save money.

“For a household with subscriptions to Netflix, Disney, Sky’s Now TV and more, it might be tempting to just have one service for a month and then flick to another. This constant churn for streaming platforms would be an irritation and the only way to stop it is to impose restrictions on when you can end a subscription or to offer a discounted annual package to lock people in.

“Billionaire investor Bill Ackman took a contrarian view and bought Netflix shares after a big slump earlier this year. He’s now facing embarrassment with the stock down 25% in after-hours trading, wiping $40 billion off its market value. Ackman is likely to shrug off any criticism for buying when the problems were clear to see as he is used to going against the tide. One must wonder if he might buy more of the company after today’s share price slump as he takes a longer-term view of its opportunities.

“There are some radical changes to Netflix’s business model now on the table. It will be interesting to see how its biggest shareholders view its chances of executing them with any success or whether it’s back to the drawing board with fresh thinking and potentially fresh leadership.”

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