Netflix had subscribers over a barrel in May, when it announced its password sharing crackdown—pony up for their own Netflix subscription or have (basically) nothing to watch. Analysts at the time seemed bullish about the announcement. In the first four days of Netflix’s new policy, the company had the highest single day subscriber increases in four years, according to analytics company Antenna.
Then, on Friday, the Screen Actors Guild announced it would join the already striking Writers Guild of America, creating Hollywood’s first double strike in over 60 years. Netflix, which is set to announce earnings Wednesday after markets close, is reporting during a pivotal time for streaming and for the entertainment industry. Its earnings will provide an illustrative look back at a recent period rife with internal changes—it went back on its previous statements that it would “never” have ads and expanded the password crackdown to the U.S. after a successful pilot abroad. At the same time, its guidance promises to be fascinating in what it will reveal about the mightiest streamer’s outlook at a time when Hollywood is dark.
At the center of the dispute between studios/streamers and those on strike are residual payments for shows on streaming platforms. Writers and actors used to be able to rely on ongoing payments for shows that were broadcast on television even after they were completed to supplement the wages they made while in production. Netflix has drawn some of the harshest criticism for disrupting this longstanding model with, for instance, the New Yorker reporting that actors on its hit show “Orange is the New Black” received negligible residual payments.
Netflix is slightly better positioned than its competitors, said Paul Meeks, portfolio manager at Independent Solutions Wealth Management, in an appearance on CNBC. He believes Netflix can more easily produce content abroad, thereby insulating itself from work stoppages in the U.S.
Despite the uncertainty surrounding the entertainment sector at the moment, Meeks said he expected Netflix to meet or beat analysts’ expectations, though “not necessarily blow them out,” when it comes to revenue, earnings per share, and what he called the “big one,” meaning net new subscribers. The new password sharing rules and the ad-supported tier were direct efforts to increase overall subscriptions, after lackluster growth following the pandemic-induced boom. For its part, the investment bank Jefferies issued a research note on Netflix, forecasting a net increase of about 2 million subscribers, up from the 1.75 million of subscriber adds from the first quarter of 2023, according to its earnings release.
In addition to possible guidance on the potential effects of the dual strikes, analysts are also eagerly awaiting further information about subscribers to its new ad-supported offering, priced at $6.99. In particular, analysts want to see growth rates in the new ad-supported tier that launched in November and get a clearer sense of cannibalization rates.
Another big question, which Meeks said he’d like to see answered on Wednesday’s earnings call, is what the financial impact of the password crackdown will be. This quarter will give investors an understanding of the success of the crackdown—at least directionally—given this will be the first time Netflix reports earnings since the policy was implemented. In its first quarter earnings call in April, co-CEO Greg Peters said similar to price increases, the company expected an initial wave of cancellations, before subscriptions and revenues pick back up again. A sentiment Jeffries echoed in its research note, estimating the effects of the crackdown could be felt into early 2024.
Meeks said he thinks these twin developments of an ad-supported tier and the password sharing policy are significant changes to Netflix’s overall business model, though he doesn’t necessarily consider that a bad thing. “When they have these wrenching changes in their business model you get a 50% discount,” he says of the company’s stock. Meeks referred to Netflix’s record subscriber loss in the second quarter of 2022, which caused the stock to fall 37% in a single day, and its decision earlier this year to eliminate its DVD business altogether as recent examples. Netflix’s stock is now trading at its highest point since January 2022.
The industrywide changes could derail Netflix’s plans to update its business. And when Netflix’s plans go awry, the Street says, they tend to do so dramatically. “When this stock goes down it goes down a hell of a lot,” Meeks said.
