User growth “brakes” and enters the game field. Will business diversification allow Netflix to continue to “fly”?

What is the chance of winning for Netflix to enter the game field?

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

After the U.S. stock market on July 20, streaming media giant Netflix (NFLX.US) released its financial performance report for the second quarter of 2021. 

Based on Netflix’s financial performance in the second quarter, Netflix’s revenue was US$7.342 billion, slightly higher than market expectations. In terms of paying users, Netflix’s paid users increased by 1.54 million in the second quarter, which was higher than market expectations of 1.12 million. Estimated 1 million. 

The financial report showed that Netflix adjusted earnings per share of US$2.97, which was lower than market expectations of US$3.14. Due to the weakness, Netflix’s stock price fell more than 6% after the market. As of Tuesday’s close, Netflix’s stock has fallen 1.8% so far this year, underperforming the S&P 500’s 15% increase in the broader market during the same period. Since the announcement of the quarterly report on April 20, the stock has fallen more than 3%, which is lower than the Nasdaq’s increase of more than 1% over the same period. 

As one of the beneficiaries of the new crown epidemic, Netflix has shown explosive growth in its users in 2020. With the end of the epidemic traffic dividend, Netflix’s user growth has been weak. Since Q2 of 2020, the net increase of paying users for four consecutive quarters year-on-year Decline. 

When the growth of paying users is weak, Netflix needs to consider how to keep the users brought by the epidemic dividend on the platform, how to increase the user’s stay time on the platform and increase the user’s ARPU value. 

Paying users growth “brakes”, the second quarter plummeted by 85% year-on-year

Since the outbreak of the global new crown epidemic last year, Netflix has “sit on” the dividends of the epidemic, and the number of paying users has skyrocketed. However, after the overdraft flow bonus, the current growth of Netflix’s paying subscribers has shown weakness. 

According to the financial report, as of the end of the second quarter, Netflix’s total global paying users reached 209 million. 

In the second quarter of 2020, Netflix’s global paid users increased by 1.54 million, slightly higher than the market’s expected 1.12 million. In the first half of this year, paying users only increased by 5.52 million, compared with a surge of 26 million in the first half of last year. Netflix’s growth in paying subscribers in the first half of this year was less than the net increase of 10.09 million in Q2 last year. 

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

(Data source: Netflix financial report) 

The growth rate of paying users is showing a weak trend. On the one hand, Netflix overdrafts future user growth due to the epidemic in 2020. On the other hand, the economic recovery drives an increase in offline activities, which in turn reduces users’ online entertainment time and consumption. Decline in willingness. 

It should be reminded that the United States and Canada, as the “base camp” of Netflix, experienced a loss of paying users during the reporting period. According to the financial report, Netflix’s paid streaming members in the United States and Canada (UCAN) decreased by 430,000 in the second quarter, from 74.38 million in the previous quarter to 73.95 million in this quarter. 

From the perspective of the scale of paying users and new paid members in different regions of the world, except for the loss of paying users in the United States and Canada, the scale of paying users in other regions has maintained growth, but from the year-on-year growth rate of net users in a single quarter, It also showed a decrease in year-on-year decline. 

In terms of specific regions, as of the end of the second quarter, the number of paid members in Europe, the Middle East and Africa (EMEA) was 68.7 million, a net increase of 190,000 paid users in a single quarter, which was lower than the net increase of 2.75 million in the same period last year and 181 in the first quarter. 10,000 net increase in the number of people; 

The number of paying members in Latin America (LATAM) was 38.66 million, with a net increase of 760,000 paying users in a single quarter, which was lower than the net increase of 1.75 million in the same period last year and higher than the net increase of 360,000 in the first quarter; 

The number of paying users in the Asia-Pacific region (APAC) was 27.88 million, with a net increase of 1.02 million users in a single quarter, which was lower than the net increase of 2.66 million in the same period last year and lower than the net increase of 1.36 million in the first quarter. 

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

(Data source: Netflix financial report) 

On the whole, in regions other than Latin America, the size of net added paid memberships has shown a sharp decline year-on-year and month-on-month. This shows that from a global perspective, the scale of Netflix’s new paying users is also showing a weak state. At the same time, due to the uncertainty in the development of the global epidemic, and the production of Netflix’s drama has not yet fully recovered, Netflix’s user growth is still facing uncertainty in the short term. 

In addition, Netflix is ​​facing fierce competition in the field of video streaming from Apple TV+, Disney+, Amazon Prime Video, and HBO Max under the telecommunications giant AT&T. 

With its huge content library and movie prowess, Disney may become Netflix’s “Public Enemy No. 1”. At present, Disney+’s streaming media platform Disney+ has 104 million users, which has caused a certain degree of diversion to the growth of Netflix’s paying users. 

Amazon spent US$8.45 billion in May this year to acquire MGM Studios, adding 4,000 movies to the content library of its streaming platform Prime Video. 

In addition, WarnerMedia and Discovery Channel have announced that they will merge to create a media giant worth 150 billion U.S. dollars; within one month after it went live last year, the number of registered users of Peacock, Comcast’s Universal Pictures streaming platform, exceeded 10 million. 

Undoubtedly, competition in the streaming media market will escalate again, and Netflix’s user growth will be under pressure. 

However, Netflix does not believe that the weak user growth is due to peer competition. Netflix said that last year’s epidemic caused content production to be delayed, so this year’s content will be more concentrated in the second half of the year. 

For example, the new season’s “Sex Education”, “The Witcher” (The Witcher), “La Casa de Papel” and the original movie “The Kissing Booth” Gal· “Red Notice” starring Gadot, and “Don’t Look Up” starring stars such as Leonardo DiCaprio and Cate Blanchett. 

In addition, Netflix recently announced three new animated comedies-“A Tale Dark & ​​Grimm” (fall 2021), “Space Dog” (fall 2021) and “Super Giant Robot Brothers” (2022 Years), for children and families around the world. 

At the end of June, Netflix announced a partnership with Amblin Partners led by the world-renowned director Steven Spielberg. According to the agreement, Amblin expects to produce at least two movies for Netflix each year, and the specific start time has not yet been determined. 

Netflix expects that paying subscribers will re-accelerate growth in the second half of the year. In the financial report, Netflix’s management looks forward to the third quarter and expects the number of paying users to be 3.5 million, which is lower than the expected 4 to 5 million. 

Price increase drives Netflix’s revenue growth

Netflix’s revenue mainly comes from membership subscription fees. With the slowdown in the growth of paid memberships, revenue and net profit have maintained steady growth, mainly due to the continuous increase in ARPU. 

The continuous improvement of ARPU mainly benefits from Netflix’s huge content barriers and better user experience, which is conducive to enhancing user stickiness and improving Netflix’s overall user retention rate. In addition, Netflix has continued to increase ARPU by increasing subscription prices and improving the account system. 

The latest financial data shows that the ARPU of the United States and Canada (UCAN) in the second quarter of 2021 was US$14.54, an increase of 10% from US$13.25 in the same period of the previous year; 

The ARPU of Europe, the Middle East and Africa (EMEA) was US$11.66, an increase of 11% from US$10.50 in the same period last year; 

The ARPU of Latin America (LATAM) was US$7.50, an increase of 1% from US$7.44 in the same period last year; 

The ARPU of the Asia-Pacific Region (APAC) was US$9.74, an increase of 9% from US$8.96 in the same period last year. 

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

(Data source: Netflix financial report) 

The continuous improvement of ARPU has boosted Netflix’s revenue growth. 

The financial report shows that in the second quarter of 2021, Netflix achieved 7.342 billion U.S. dollars in revenue, an increase of 19.4% from the 6.148 billion U.S. dollars in the same period last year, slightly higher than the 7.32 billion U.S. dollars expected by analysts. Since 2017, Netflix’s revenue growth in this quarter has hit a record low year-on-year. 

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

(Data source: Netflix financial report) 

The financial report shows that in the second quarter of 2021, Netflix’s operating profit was US$1.848 billion, an increase of 36% from US$1.358 billion in the same period of the previous year, and slightly lower than market expectations of 1.856 billion. This was mainly due to changes in the expense side. 

Financial data shows that in the second quarter of 2021, Netflix’s operating costs were US$4.018 billion, an increase of 10.3% from US$3.644 billion in the same period last year, and an increase of 3.9% from US$3.869 billion in the previous quarter. In the second quarter, Netflix’s operating cost ratio was 54.7%, a decline from 59.3% in the previous quarter, and basically the same as the previous quarter. 

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

(Data source: Netflix financial report) 

Marketing expenses also increased significantly in the second quarter. Financial data show that in the first quarter of 2021, Netflix’s marketing expenses were US$604 million, an increase of 39.2% from US$434 million in the same period of the previous year, and an increase of 17.7% from US$504 million in the previous quarter. 763 million US dollars, a decrease of 32.8%. The marketing expense ratio rose from 7.1% in the previous quarter to 8.2% in this quarter. 

User growth "brakes" and enters the game field. Will business diversification allow Netflix to continue to "fly"?

(Data source: Netflix financial report) 

In the second quarter of 2021, Netflix’s operating profit margin was 25.2%, a slight decline from the 27.4% in the previous quarter. However, from an overall point of view, Netflix’s operating profit ratio has maintained growth; in terms of net profit, in the second quarter, Netflix’s net profit was US$1.353 billion, with adjusted earnings per share of US$2.97, which was lower than market expectations of US$3.14. 

Will the diversification of businesses such as games allow Netflix to continue to “fly”?

The slowdown in the growth of paid streaming members is an indisputable fact. Netflix is ​​trying to find new growth points through diversified business layout. 

In June of this year, Netflix opened an online store that sells original products related to Netflix’s film and television works, such as “Stranger Things”, “The Demon Hunter”, and those who were nominated for the 2021 Emmy Awards for Best Drama Series “Bridgerton” (Bridgerton) and other peripheral products. 

Earlier, there were reports that Netflix hired Mike Verdu, a former Facebook executive responsible for VR content, to explore opportunities in the field of video games. The news of Netflix’s entry into the game field has been confirmed. Netflix said it is in the early stages of scalable video game products, and users can get these products for free. 

Netflix will initially focus on mobile games. Netflix stated in its shareholder letter: “We see games as another new content category, similar to our expansion into original films, animations and TV series.” 

Netflix co-CEO Reed Hastings (Reed Hastings) said that Netflix will not rely on features such as games or consumer products to generate separate profits. He said, on the contrary, the focus is to make core streaming services better. Hastings also said that gaming and other venture capital, such as podcasts and merchandise sales, will be “supporting factors” that will help attract and retain customers for its core business streaming video. 

Regarding Netflix’s entry into the game field, some experts believe that the competition in the game field is already very fierce, and Netflix’s strategy of entering the game field as a video content platform will not work. 

In fact, Apple, Amazon, and Google giants have all set foot in the game field before, but none of them seem to achieve the expected results. According to foreign media reports, in February of this year, Google announced the closure of its Stadia game R&D department, allowing Stadia to refocus on serving as a game platform service for existing developers, instead of developing its own games for the service; in April this year, Amazon Games worked Room canceled the free massively multiplayer online game project based on “Lord of the Rings”. 

It can be seen from this that not all players who enter the game field can make money, and the big guys are no exception. For Netflix, entering the game field across borders also faces considerable risks. 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/user-growth-brakes-and-enters-the-game-field-will-business-diversification-allow-netflix-to-continue-to-fly/
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