Netflix Goes on the Offensive

Netflix

COVID-19 helped streaming service Netflix (NASDAQ:NFLX) achieve an unprecedented boom last year. In the first half of 2020, 25 million additional users signed up for a Netflix subscription. But the rapid user growth stalled in recent months. What happened?

Competitors like Disney (NYSE:DIS), HBO, and Amazon (NASDAQ:AMZN) took bites out of market share and increased their digital presence. In addition, Netflix’s movie studios faced corona-related delays in the production of new series and content. As a result, in the second quarter of 2021, the global number of Netflix subscribers increased by only 1.5 million – too little for investors’ high expectations.

Although the company still has the most paying customers among the streaming services (270 million), it could attract fewer new users in Q2 than ever before in a quarter. Particularly bitter: In the important markets USA and Canada, Netflix had to accept a decline of 430,000 subscribers.

For investors, this is a disappointment that is further reinforced by the forecast for the current quarter: By the end of September, Netflix expects only 3.5 million new customers. Experts had forecast 5.5 million.

Despite those figures, the company had financial strength. The profit shot up in Q2 2021 compared to the same period last year by almost 90% to $1.4 billion. Revenue improved by almost 20$ to 7.3 billion. The return on sales was thus a good 20%. Only in the first quarter of this year did Netflix achieve a better result.

Netflix Needs Greater Diversification

Netflix boss Reed Hastings made every effort to continue to fuel the growth story around streaming content. There remains no question that the market is gradually approaching saturation. 

In addition to new series, seasons, and films, for which it intends to invest $17 billion, Netflix wants to create synergies with the classic streaming content and increase customer interest.

The Group has communicated two concrete plans to its shareholders in this regard. The first is merchandising. At the beginning of June, Netflix opened an exclusive online store. As a result, fans will be able to find exclusive merchandise for Netflix’s most popular in-house productions. Former Nike manager Josh Simon is responsible for the store. Simon was already successfully responsible for product design and merchandising at the sporting goods manufacturer.

The manager describes the online store as a one-stop store that combines selected products with Netflix’s unique storytelling. So, for example, figurines for the hit series The Witcher, corresponding T-shirts, boxer shorts, and caps can be found there. The business model, which among other things, aims to make the company’s brands more visible to the public, can be seen as a frontal attack on the king of merchandising: Disney.

A Slice of the Gaming Pie in its Sights

The second new pillar is likely to be even more promising. Netflix, for instance, wants to conquer the gaming market, which COVID also fuels. As Bloomberg reported, Netflix plans to make games available via the streaming platform at no additional charge. The U.S. company is thus pursuing the now-familiar strategy of running video games on servers in the network. 

The advantage: users can access them from all kinds of devices. Netflix will thus be in direct competition with Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Nvidia (NASDAQ:NVDA), which are pushing similar projects.

Company boss Hastings had already let it leak out years ago that the company was to be shaped into something bigger that also wanted to keep up with YouTube, social media, and other forms of digital entertainment. However, in terms of gaming, the company is still in the early stages.

It remains unclear which specific games will be developed and whether the development will be handled by a subsidiary or outsourced to an external company, for example. Only this much is known: The games, which are initially intended primarily for smartphones, are to get by without advertising and in-app purchases since the monetization will occur via the regular Netflix subscription. The developers can therefore concentrate fully on creating entertaining games.

Netflix’s growth in user numbers is faltering. Although the Group is raking in hefty profits, it’s logical to diversify the streaming provider and appeal to a broader audience. With merchandise and gaming, this can succeed. Ultimately, the quality of video games will determine success. If Netflix manages to pull off a surprise hit here, the streaming leader would be well on its way to the future.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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