Netflix smashed it out of the park with its Q4 2023 earnings. Investors cheered its surprising growth to nearly 261 million global paying subs, about 5 million more than analysts expected. It also grew its demand for original series for the first time in over four years with both U.S. and international audiences, before Disney+ and Apple TV+ launched.
It was an ironic twist, since Netflix management had spent the bulk of last year trying to re-train us to focus on revenue growth after fairly tepid subscription growth numbers the past few years. Perhaps co-CEO’s Ted Sarandos and Greg Peters second guessed their decision, especially since revenue and earnings results performed far less spectacularly versus expectations. But why quibble? Their Q4 earnings call was a good day, and the Street rewarded investors for it.
Yet the metrics that matter most – yet received far less coverage – are Netflix’s impressive churn and profitability numbers. That’s where Netflix really shined – and really surprised. Netflix was immensely profitable, and it’s easy to see why. Its monthly churn number – perhaps the single most critical one that drives profitability – now steadily hovers at a around 2% and is the envy of the streaming world.
No other streamer comes close. Disney+ — the streamer you’d think every kid would convince their parents to buy (and keep) – is saddled with a monthly churn more than double Netflix’s. Even almighty Apple – the brand that boasts perhaps the most rabid of fans – clocks in at a whopping 8% churn, about 4X Netflix’s number.
It wasn’t that long ago that many (myself included) wondered if Netflix would ever reach long-term profitability. After all, Netflix is a pure-play streamer awash in a sea of Big Tech media streaming goliaths. It faces obstacles the 800-pound gorillas don’t. Netflix monetizes one thing and one thing only – content. The Big Tech streamers, on the other hand, use content as marketing. Case in point: Apple’s new ad campaign for its hoped-for “next big thing” – the Vision Pro headset – which leverages the power of iconic band Devo’s iconoclastic music to drive sales. Tim Cook and crew want us all to have an “Uncontrollable Urge” to put on the headset and buy its other high-margin products (iPhone, Macbooks). Apple TV+ and Apple Music profits are a bonus afterthought.
Apple’s cash reserves to finance new content, of course, dwarfs Netflix’s resources, even as Netflix’s own content budgets consistently ballooned upward to about $17 billion in 2020. That math simply didn’t pencil out, as I pointed out time and time again over the years.
But then something magical happened. Netflix tightened its content belt (relatively speaking, of course), and kept its content spend essentially flat, with the exception of this past year where it actually reduced its budget due to the strikes — and now in 2024 it has raised its content budget back to $17 billion. It also cracked down on password sharing, diversified into games and experiences, and added an ad-supported tier. These are things I recommended at the time, even as the company vehemently denied it would ever “go there” (as it did with advertising).
Of course, there would seem to be some real risk in Netflix’s new relative content austerity that helps its bottom line. That at least theoretically opens the door to others who can spend, spend, spend to catch up in our “streaming wars” world.
But size alone doesn’t matter, and Netflix has in many ways defied the odds by beating back Big Tech media and studio big threats (Disney+, Max, Paramount+) simply by being the fearless first mover. It risked it all by paying up to build its own massive library of content that draws us in and then keeps us there, straight chillin’. Why stress for other options when your good friend is right there by your side with its captivating and endearing “bum bum” opening number? That sound signals a continuously refreshed line-up of “throw-spaghetti-against-a-wall-to-see-what-sticks”’ programming which, it turns out, really does stick! There’s always something new for everyone, and now its studio competitors are again licensing their content to deepen Netflix’s pool, which suits it just fine (“Suits,” of course, became a global phenomenon on Netflix for the first time).
Let’s face it, it takes real work (okay, some minimal effort) to exit Netflix and enter a competing world that requires navigating a less-familiar menu with significantly fewer options, even if those options are bigger ticket in many ways. We’ve all had hard days and want things to be easy as we end the day. Why try door number two, when door number one is right there in front of you and no one in the family tries to block you from entering it or negotiating it out of your monthly budget? Sure, it was easy to rack up and rationalize multiple streamers during the pandemic when we couldn’t leave our couches and spend on anything else. Hell, it was necessary to stay sane! But all of us are now back to fiscal reality and focusing on reducing our monthly burns.
So, let’s give Netflix’s enviable churn numbers the headline status it deserves. Netflix is our “Brokeback Mountain,” our Chicago band’s “Hard Habit to Break.” Despite continuous price hikes — and more signaled to be coming in the not-too-distant future — we just can’t quit it. Netflix is in our collective DNA at this point, password crackdowns and a dearth of franchise content be damned. It’s a good old-fashioned smackdown of the others.
Oh yes, Netflix now has that too. It just became the home of the WWE’s Monday Night Raw, yet another bowl of fresh spaghetti — this time a live sports-related programming one — that it can throw against the wall.
Major studio-backed streamers hope that perhaps 1+1 M&A new math can topple this seemingly invincible leader. But cobbling together two high churn “also rans” does not mean success. Nor does the mere might of Silicon Valley tech. At this point, Netflix has won the streaming wars and is a continuing lock unless a new kind of challenger enters the ring with its own special sauce and sticky formula.
Could TikTok be the one with the necessary honey as it continues to broaden its focus on longer-form content?
Reach out to Peter at firstname.lastname@example.org. For those of you interested in learning more, sign up to his “Fearless Media” newsletter, visit his firm Creative Media at creativemedia.biz, and follow him on Threads @pcsathy.
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