The Daily: Is Netflix’s glass half full, or half empty?

On today’s podcast episode, we examine Netflix from all angles. While subscriptions were up in Q3 of this year, they were down compared to the previous Q3. Find out everything you need about the streamer’s quarterly report by listening to the discussion with Senior Director of Podcasts and host Marcus Johnson and Analyst Daniel Konstantinovic.

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Episode Transcript:

Marcus Johnson (00:00):

This episode is brought to you by TikTok for Business. Are you ready to riz up your brand? Well, you're in luck. TikTok is where discovery drives outcomes and three in four users say they will buy from a brand they've seen on TikTok's platform. Learn more at TikTok.com/business.

Daniel Konstantinovic (00:20):

I think we're starting to see the much longer than expected surge of new subscribers from the password sharing crackdown that they started a while ago start to run dry a little bit and the question after that becomes what's next?

Marcus Johnson (00:41):

Hey gang, it's Tuesday, October 29th. Daniel and listeners, welcome to the Behind the Numbers, daily EMARKETER podcast Made possible by TikTok. I'm Marcus. Today I'm joined by our analyst who writes for our marketing and advertising briefing. He's based in New York. It's Daniel Konstantinovic.

Daniel Konstantinovic (00:58):

Hello. Good to be here.

Marcus Johnson (00:59):

Hey fella. Thanks for hanging out today. We're talking Netflix, but we start with the fact of the day. Las Vegas translates roughly into the meadows. That's right. That's city in the middle of the desert, that's what it translates to apparently. According to the Smithsonian Magazine in 1829, it's a short history of Vegas, in 1829, a group of explorers led by Spanish merchant Antonio Armijo and his scout Rafael Rivera discovered a particularly burdened area full of grassland irrigated by a natural spring. Hence, the name The Meadows or Las Vegas. It took about four years for prospectors to discover the valley, finding gold and silver and sparking a population boom. Around 1900, the oasis town became a rest area for wagons, trains, and a stop on the new railroad connecting LA and Salt Lake City. It was completed in 1905. In 1911, Las Vegas was incorporated as a US city.

Daniel Konstantinovic (02:00):

That same oasis is now where the Hard Rock Cafe is.

Marcus Johnson (02:06):

I don't trust this at all. You trying to tell me there was water and trees there once.

Daniel Konstantinovic (02:11):

Yeah. Wow. Well, I mean for the amount of water they use over there,-

Marcus Johnson (02:14):

Yes.

Daniel Konstantinovic (02:15):

They could do it. They could turn it into a lush densely forested area.

Marcus Johnson (02:20):

So gambling outlawed first, but then casinos, secret casinos popped up and in 1931 everything changed. Nevada became the first state to legalize gambling. Around the same time, speaking of how it gets its water, construction began on the Hoover Dam, which would provide water and power to the valley. Anyway, that's Las Vegas. Today's real topic, why Netflix Q3 was both better and worse than expected.

(02:51):

So Daniel talking Netflix, how they've been doing recently. We'll discuss. Netflix added 5 million subscribers. Let's start there. How many people are watching Netflix? They added 5 million new people in Q3. Two ways to look at that Danny. Glass half empty is that's worse than the near 9 million they added last Q3. Glass half full is it was 14% growth year-on-year versus 11% growth last Q3. So it depends how you look at that 5 million new subscribers, whether you look at the total additions or whether you look at compared to last year, whether you're looking at growth. But that brings Netflix's total subscribers worldwide to 283 million. We'll play slice of pie for this question. Danny, you've created a pie chart for us as to the reasons three max, why Netflix was able to grow subscribers, 14% in Q3, adding 5 million people. What are the main reasons in your opinion?

Daniel Konstantinovic (03:48):

I gave a 40% of the pie to the ad supported tier and bundles. So Netflix said that half of its subscription gains this quarter came from the ad supported tier. So that shows that there is a big appetite among consumers for cheaper entry points to streaming, even if it means watching with ads. There are a lot of bundle offerings as well. Like Netflix has a package deal with Max, for example. So these bundles give you access to the ad supported tiers for two streaming service. So there's kind of even more of a value proposition there for consumers. So this is really good news for Netflix. I mean, there was concern that because they had taken such an anti-advertising approach for so many years that they would have trouble convincing people to sign up for the ad supported tier. But the fact that everyone has launched an ad supported tier has kind of dulled that a little bit and consumers have shown that they're definitely willing to put up with it if it means that they can have more entertainment than none at all or more streaming entertainment than none at all.

Marcus Johnson (04:52):

Did I read though that they're going to be saying goodbye to the competitor streaming service bundles? They said that their growth strategy will not be by bundling itself with other streaming services going forward. So I think they're going to try to pull back from that, at least that's what I think I read.

Daniel Konstantinovic (05:09):

Yeah, it seems like Ted Sarandos might've said that,-

Marcus Johnson (05:12):

He did?

Daniel Konstantinovic (05:13):

Like the earnings call. Yeah.

Marcus Johnson (05:14):

Okay. But yeah, up until now it seems to have added some value to everyone's streaming service that's involved in these bundles, but it does seem like they're not seeing that as a long-term strategy.

Daniel Konstantinovic (05:23):

Yeah, that's interesting for a couple of reasons. I mean, one being that they started this year launching a handful of those bundles with competitors, but if you are a leader in streaming, like Netflix certainly is, and you have this massive, massive audience, all of these second or third tier of streaming services in terms of subscriber counts kind of need to piggyback off of you to increase their viewership. But if you're Netflix, you can just say get off.

Marcus Johnson (05:54):

Yep.

Daniel Konstantinovic (05:55):

Those are my subscribers.

Marcus Johnson (05:56):

We don't need you.

Daniel Konstantinovic (05:56):

What are you doing? So a lot of power is I guess vested in Netflix there. But yeah, I would give the ad supported tiers and those bundle offerings that exist at least for now 40%. The next 40% of the pie, which is that in-demand content. Netflix is synonymous with streaming. It continues to have strings of really popular movie launches, popular shows that are getting new seasons, a lot of reality content that is very popular as well. There's a huge breadth of media available on Netflix.

Marcus Johnson (06:29):

Yeah.

Daniel Konstantinovic (06:29):

And having that brand presence is like this name of streaming and being the first thing people look up when they're looking for a streaming service to subscribe to, I think benefits them a lot.

Marcus Johnson (06:41):

And interesting to note, they said that they're back on track now after the writers and actors strike derailed production last year. It's easy to forget that Netflix had those head, I mean a lot of other streaming services, but them included, had those headwinds heading into this year.

Daniel Konstantinovic (06:53):

Yeah, I mean it was a big disruption for these companies and you could see it in their earnings at the time, but it seems like pretty much all of them have kind of,-

Marcus Johnson (07:00):

They're shaking it off. Yep.

Daniel Konstantinovic (07:01):

Shaking it off. Yeah. And then that last 20%, is my math right? 40, 40, 20? Yes, it is. I'm an analyst. I gave a 20% share, and maybe this could be smaller, to sports. So this is something that is kind of around the corner for Netflix. They won the rights to a, I believe it's Christmas day NFL game, which is a really big deal for Netflix. So that will happen in this coming quarter, and then in early next year, they will become the official streaming partner of the WWE.

Marcus Johnson (07:33):

Yep.

Daniel Konstantinovic (07:34):

So I would expect that you would see more subscribers around those events, like when the holiday season rolls around, people will subscribe for that football game or when the WWE season is about to kick off, you'll see a bunch of those fans signing up for Netflix.

Marcus Johnson (07:50):

Before the boxing match they got Tyson versus Jake Paul November 15th.

Daniel Konstantinovic (07:54):

Oh, I was going to say who won that? It was like something that,-

Marcus Johnson (07:57):

Well, they rescheduled it. They were supposed to have it and they had to push it back for one reason or another. But yeah, they've got the boxing match. They've got two NFL games,-

Daniel Konstantinovic (08:05):

Yeah, that'll be interesting as well.

Marcus Johnson (08:06):

On Christmas Chief, Steelers and Ravens, Texans. And then they've got, as you said, WWE next year as well.

Daniel Konstantinovic (08:11):

Yeah, so if you look at the subscription games that YouTube TV for example made when it got Sunday Ticket, you'd see that consumers really base their digital video decisions, especially subscription decisions around sports content.

Marcus Johnson (08:28):

Yep.

Daniel Konstantinovic (08:28):

So again, I would be surprised if a lot of the majority of those new subscribers are joining now way in advance of the thing that they want to watch. But it's certainly possible and they have stuff coming up pretty quickly that I think will drive some notable subscription growth.

Marcus Johnson (08:44):

Two things for me quickly on the subscriber numbers. I wonder how much the CEO, co-CEO Reed Hastings, his endorsement of Kamala Harris affected net subscribers in Q3 because our colleague Jeremy Goldman was noting Netflix saw a sharp rise in cancellations after co-founder Reed Hastings endorsed Kamala Harris on X and donated 7 million to her campaign. He said churn nearly tripled according to antenna peaking on July 26th after Donald Trump's supporters called for a boycott. Well, that last I don't know, but it's interesting to note what that did to the numbers.

Daniel Konstantinovic (09:17):

Yeah, I mean, that's an interesting point. My instinct when a narrative like this pops up is that these boycotts are maybe a flash in the pan or a momentary blip and not something that is really going to affect the bottom line. The counterpoint to that of course, would be what's happened with Bud Light and Target, which were two consumer protests that had a really big impact on some notable companies.

Marcus Johnson (09:43):

Yeah.

Daniel Konstantinovic (09:43):

But I think it's easier to do a boycott of physical goods more effectively than it is for something like a streaming service. And even if people unsubscribed, maybe those same people want to watch the WWE when it comes around.

Marcus Johnson (09:43):

Yeah.

Daniel Konstantinovic (09:58):

Or something like that. There are a lot of people who cancel and then resubscribe at a later date.

Marcus Johnson (10:03):

One more thing for me before we move on to the money side of things, I thought interesting regions as often is the highly lucrative North America and they only added 700,000 new subscribers in North America. It's the lowest amount since Q1 of 2023. However, revenue in that region was up 16% year-on-year. So four times what it was last Q3. So that's great for average revenue per user in North America. So let's talk more about the money side of things. For Netflix, they made 9.8 billion, call it nearly basically 10 in Q3. That's 15% growth year-on-year, close to double the growth of the same period last year. So Danny, slice the pie again, your pie chart as to the reasons three max, why Netflix was able to grow revenue 15% in Q3.

Daniel Konstantinovic (10:47):

Netflix made some really notable gains in advertising this quarter that I think are probably what people are paying the most attention to or what investors are paying the most attention to, certainly advertisers. Over half the new memberships came from advertising like we said, but there were also some big, I guess, outreach or accessibility efforts to advertisers.

Marcus Johnson (11:11):

Yeah.

Daniel Konstantinovic (11:11):

So first off, the company said it secured 150% more in upfront commitments during the big advertising season than it did last year. So that shows that there is a big increased appetite for Netflix inventory compared to what there was a year ago when the narrative around the ad supporter tier was like advertisers really wanted them to launch this, but now it's out there and where are the advertisers? So I think that is a really significant gain. And Netflix inventory is also now available on some major demand side platforms.

(11:43):

So advertisers can buy Netflix inventory through exchanges operated by The Trade Desk or Google now, which makes it way easier to include that inventory in your regular purchasing if you're a brand. And as sports becomes part of their content offerings, like a much more consistent part of their content offering, that might only go up and make the value of that ad space more valuable too. Because when Amazon entered the market and Disney even before them, and by the market, I mean the ad supported streaming market, Netflix had to lower its CPMs far below what it seemed it wanted to price them at.

Marcus Johnson (12:23):

Yeah.

Daniel Konstantinovic (12:24):

So when sports gets added to the portfolio, they can presumably charge much higher prices for that inventory since demand will be very high.

Marcus Johnson (12:32):

Yeah, I think they were in the 65 range when they first came out and then dropped precipitously.

Daniel Konstantinovic (12:36):

Yeah. Before it came out, there were stories that at up front they're asking for 65 and then the reaction to that was really negative. So they rolled it back and they were like, that's not true. Settled somewhere around 50 to 55. But over the consecutive months, that number in reporting just kept dropping and dropping and dropping.

Marcus Johnson (12:54):

Yeah, on the ads business engagement, it seems to be on the two separate plans seems to be comparable. Netflix ads plan, the view hours per membership are similar to what they are on the standard no ads plan. So getting comparable engagement from both the ads and the no ads plans, which is positive. On the money side of things, for me, two things jumped out. One, there seems to be a sustained period of growth for them getting back on track in terms of revenue. That 15% growth in Q3 was the fourth consecutive quarter of double-digit growth, the five quarters before that had been in the single digits. And then two, it's really focusing on profitability, Netflix, like a lot of other tech platforms players we've seen pivot away from growth of revenue and subscribers and more towards one of profitability. Q3 was its most profitable quarter ever and making close to $2.4 billion. That's nearly as much profit as last year's Q3 and four combined just in this Q3 alone. So I thought that was noteworthy. Danny, what else are you paying attention to, close attention to when it comes to Netflix at the moment?

Daniel Konstantinovic (14:00):

I think the subscriber growth is an interesting figure. We talked about how they added 5 million this quarter, and that was down from 8.8 I think it was, or close to 9 million in Q3 2023.

Marcus Johnson (14:14):

Exactly. Yep.

Daniel Konstantinovic (14:15):

It's also down from around 8 million last quarter. So I think we're starting to see the much longer than expected surge of new subscribers from the password sharing crackdown that they started a while ago,-

Marcus Johnson (14:29):

Oh, good point.

Daniel Konstantinovic (14:29):

Start to run dry a little bit. And the question after that becomes what's next? How do they drive revenue once subscriber growth substantially slows? I think for now the answer is sports. They're hoping that that will be a big driver of not just ad revenues, but also new subscribers from fans of the WWE or whatever big league or event they happen to host. And as for what beyond that, I'm not really sure. I mean, the market is definitely starting to hit a point of saturation. It's why you see a lot of these smaller streaming services starting to bundle with the big leaders. I mean, Apple TV just signed a deal to be distributed on Prime Video, for example, because they're really struggling to increase subscriptions meaningfully since almost everyone it seems has a streaming subscription of some kind. So yeah, I'm curious what in a year from now they're going to be kind of teeing up as the next big initiative at the company.

Marcus Johnson (15:29):

Yeah, it's a great point because companies start off trying to grow users and dollars and then they pivot at some point. They kind of grow up and then they focus on profits and engagement and the profit piece, they seem to be doing pretty decent. And they said that the analysts were expecting a price increase, at least start of next year to their core plan. So that's one way that they can increase the profit. Engagement, I thought it was interesting, Danny, Netflix is not growing its share of TV time. So the company reported that Netflix users are spending two hours a day on the platform. That's more time than folks spend per day with social media according to our estimates. So this was really good numbers.

(16:07):

However, I was looking at Nielsen's Gauge, which counts where folks spend their time watching TV and Netflix's share of the pie, whilst an impressive 8% of all TV time, all of it streaming, traditional cable, satellite, all of it, 8% of all of that is spent watching Netflix on a TV. That has been stuck for the past year. It's been at 8% for the last 12 months. During that time, YouTube's gained about a point and a half of share. Disney+, Tubi, and the Roku channel have all gained half a point each. So to your point, they can't just stand still. They've got to find ways to try to grow their engagement. You were saying where the next initiative is going to come from. It also seems like they're no longer going to pursue making their premium AAA games.

Daniel Konstantinovic (16:50):

Yeah, that was something, I'm glad you brought that up because if you didn't, I was definitely going to.

Marcus Johnson (16:54):

Pleased. Yeah, what's your take there?

Daniel Konstantinovic (16:56):

Yeah, I mean, I've been fascinated by Netflix's gaming effort for a while now, and something we've been writing about a lot in the marketing and advertising briefing is that gaming, it's major entertainment in the same way that TV and movies are. But the economics of game development are vastly different. When a movie is being made or show is being made, you'll typically see a year turnaround time from production to release. With games, it could be years and years and years. And the scope of projects changes significantly during development. It's very volatile. It's a form of entertainment that just doesn't line up with the way that Netflix does business. It's not something that they can really rely on meaningfully quarter after quarter for results in the way that they can with video content or at the very least AAA stuff, which is like big blockbuster stuff. Certainly,-

Marcus Johnson (17:52):

Extremely expensive.

Daniel Konstantinovic (17:53):

Yes. And I mean the item in the news was that Netflix shuttered its AAA studio in California before it could even release what it was working on, which is something, like if you follow the video game industry, that kind of thing happens all the time. So it's not surprising that Netflix would maybe back off these bigger longer term costly productions and focus more on quicker things like mobile that are not just faster to make, but have a lot more monetization options or towards smaller kind of independent premium gaming experiences. Like with the studio, they acquired Night School Entertainment, the first gaming acquisition they made, but even that type of project is turbulent and volatile because Night School had to delay its first game under Netflix leadership like two times I believe. So it came out years later than expected to not much fanfare promotion from Netflix.

Marcus Johnson (18:47):

Yeah. And it seems like they're moving away from the AAA, the kind of premium games, but they said they're instead focusing on producing, as you said, mobile casual games as they put it. And there was another piece in The Journal I was reading, I think it was Sarah E. Needleman, and she was saying that they could put AAA games from third parties on the platform, so they're not completely off the table, but they're not going to be producing them from scratch and still maybe looking to be an entertainment hub, not just somewhere you go to stream films and TV shows, but trying to still put games on the platform. That's not a brand that you associate with games. I don't know if they'll ever be able to, but it seems like it's still on their minds, just a different flavor of games perhaps, or a different type of strategy.

(19:28):

I'll end with this Danny, Q4. What kind of a bump can we expect from Netflix? You mentioned a few things which I think are definitely of note. You've got the Tyson-Paul fight November 15th. They've got the NFL games that are going to be played on Christmas day. They've got a new season of Squid Game. It's most watched series globally to date. That comes out December 26th as well, so that should help them. We've also only got one quarter of data left to receive from the video streaming giant Alex Weprin of The Hollywood Reporter noting as others have Netflix will stop reporting subscriber numbers and average revenue per member beginning in Q1 2025, so.

Daniel Konstantinovic (20:04):

Yeah. Unfortunate news for those of us who watch these numbers closely and report on them, but also not that surprising. Like we were saying, if the subscriber well starts to run dry a little bit, not putting that number front and center isn't such a bad thing.

Marcus Johnson (20:21):

We've seen it from Meta with their daily active users. They stopped reporting them at the start of this year, which is interesting. Netflix expected to make over $10 billion in Q4, which would be the first time it crossed into the double digits for quarterly revenue. We'll see. All right, to close out today's episode, Danny, let's give Netflix a grade for their Q3 performance. In Q2 you gave them a B. What do you think they deserve this quarter?

Daniel Konstantinovic (20:46):

So I would give Netflix a B minus for this quarter. They definitely pulled ahead in some areas and things on the horizon, like sports definitely bode well for their ad business, which appears to be growing at a pretty good pace after kind of a slow start. But their password sharing runway is really starting to slow down, as we've seen with the quarter over quarter subscriber drop and the year-over-year subscriber drop in this quarter. So what the next pool of consumers that they're going to tap for meaningful subscriber growth is, is still pretty unclear and something that I'm sure they are anxiously trying to figure out.

Marcus Johnson (21:23):

That's what we've got time for today's episode. Thank you so much Danny for hanging out with me today, my friend.

Daniel Konstantinovic (21:26):

Yeah, it was a pleasure.

Marcus Johnson (21:27):

Yes, sir. Thanks to Victoria who edits the show. Stuart runs the team and Sophie does our social media. Thanks to everyone for listening in to the Behind the Numbers daily, an EMARKETER podcast made possible by TikTok. Tune in tomorrow to hear a special edition of our retailer ranking episode with host Sara Lebow who will be speaking with Becky Schilling, Sky Canaves, and Sarah Marzano. On November 1st, EMARKETER is hosting a virtual summit. You can learn all about the top trends of 2025 with a keynote from analysts Sarah Marzano and Evelyn Mitchell-Wolf. Panels hosted by analysts, Kelsey Voss and Yuri Wormser, and featuring executives from top brands. All of this starts at 11:30 AM Eastern on November 1st and is hosted by EMARKETER's Vice President of Content Suzy Davidkhanian and Senior Director of Client Briefings Jeremy Goldman. Use the link in the show notes to register today.