Netflix‘s Inc (NASDAQ:NFLX) subscriber numbers proved to be a nasty surprise for investors overnight and potentially signalled that the pandemic-inspired boom for the streaming platform has come to an abrupt end.
In its first-quarter results, released after the close on Tuesday, the platform reported 3.98mln people signed up to the platform in the first three months of 2021, well below forecasts of 6mln. Total paid memberships were up 14% at 207.6mln, again below company forecasts of 210mln.
The sharp drop in new subscribers comes at a bad time for the company, which is currently seeing its dominance of the sector challenged by well-funded and content-rich competitors, notably Disney+, which launched a year ago and has seen its subscriber base more than treble.
With this in mind, one analyst said that in order to maintain its position in the fiercely competitive sector, Netflix will need to keep pouring cash into its original content development.
“Investment in content is showing no signs of easing up which will be paramount. This is encouraging for retaining subscribers and attracting new users to sign up”, Paolo Pescatore, media analyst at PP Foresight, told Proactive.
“Exclusivity is key in this race for supremacy in a post-pandemic streaming watch party”, he added.
One benefit Netflix has despite its recent weakness is that it already has a massive existing library of original content to keep its subscribers hooked including royal drama The Crown and successful period series Bridgerton in addition to several movies that have attracted the attention of industry awards bodies such as the Oscar-nominated Trial of the Chicago Seven.
This drive to expand its content library has come at considerable cost to Netflix, which in the past has often been reliant on external financing to boost its cash reserves and fund its spending splurges.
However, Pescatore notes that Netflix is now “at a different phase of growth” compared to its newer rivals, who will now need to spend those same huge sums on content while the company itself may be approaching equilibrium in its own spending needs.
“The year ahead will be pivotal in being more self-sufficient than dependant on other financial sources. It will be many years before many other streaming services turn a profit. All are placing huge bets and will be loss leaders for years”, the analyst said.
In contrast to its rivals, Netflix has already become a profitable business, reporting an operating profit of US$4.6bn for 2020, up 76% year-on-year, which in turn will bring plenty of cash to boost its coffers and avoid a reliance on external financing as it has done in the past.
While rivals such as Disney+ may have deep pockets, they are still “in a start-up mentality”, says Pescatore, and as such will need to burn large amounts of cash in order to catch up to Netflix before presenting a threat to its market share.
“Netflix is the undisputed leader and fully expect it to remain so for the short term, despite fierce competition”, he added.
This same view was echoed by Netflix co-founder, chairman, president and co-chief executive Wilmot Reed Hastings on an earnings call on Tuesday, where he said the competition in the market was nothing new for the firm.
“We’ve been competing with Amazon Prime for 13 years, with Hulu for 14 years. It’s always been very competitive with linear TV, too. So there’s no real change that we can detect in the competitive environment. It’s always been high and remains high”, Hastings said.
Shares in Netflix were down 8.8% at US$501.50 in pre-market trading in New York on Wednesday following the weaker-than-expected results overnight.