Increased competition caused Netflix to increase its new users less than expected and wanted to raise prices to stabilize revenue growth


Key points:
・ Netflix added 8.3 million users worldwide in the fourth quarter, less than the expected 8.5 million;
・ in the fourth quarter, the revenue was $7.709 billion and the net profit was $607 million, which was in line with Wall Street’s expectations;
・ as competition intensifies and the epidemic continues to affect, the new users of Netflix in the first quarter will be less than expected.
Tencent technology news on January 21, the share price of Netflix, a video streaming media giant, plunged more than 20% in after hours trading on Thursday because the company’s forecast for user growth was lower than Wall Street’s expectations. But investors got something else they had always wanted: a change in corporate governance.
Over the past decade, Netflix has been one of the most dazzling stars on Wall Street. The information provided by the company in the shareholders’ letter shows that from listing to the end of 2021, the company’s share price has increased by 56128%, which is much stronger than the increase of 1052% of the Nasdaq composite index in the same period; The annualized yield reached 38%, stronger than the 13% increase of the Nasdaq composite index in the same period.
New users are less than expected
In novel coronavirus pneumonia, Netflix said it expects the number of new customers to be increased this quarter will be much smaller than that of a year ago, as the company is adapting to the growing competition and the persistent disruption of the new crown pneumonia epidemic. Netflix expects to add 2.5 million subscribers in the first quarter of 2022, compared with 4 million in the same period last year. The company added 8.3 million subscribers worldwide in the fourth quarter of 2021, about 200000 lower than the previously estimated 8.5 million. Netflix’s new users in the fourth quarter mainly came from Europe, the Middle East and Africa, reaching 3.5 million; The most important markets in the United States and Canada increased by only 1.2 million people.
Although Netflix launched new films and TV series including “don’t look up”, “Wizard” and “Cobra” in the fourth quarter, the number of subscribers was less than Wall Street expected. Netflix said in its novel coronavirus pneumonia that its subscriber growth rate has not yet recovered to the level before the new crown pneumonia epidemic. The company said the reasons included “continuing epidemic” and economic difficulties in regions including Latin America.
Netflix said increased competition could also be a factor. In the past, Netflix has tended to play down competition from newer streaming platforms, including Disney’s Disney + and at & T’s HBO max.
Netflix also said that the growth forecast of subscribers in the first quarter reflected the fact that more new content was weighted to the end of the quarter, including the second quarter of Bridgeton, which is expected to be launched in March.
Recognizing that competition affects growth
The latest Netflix shareholder letter has a line that can be heard all over the world: “although this additional competition may have some impact on our marginal growth…” this clause sounds nothing, but it is Netflix’s most powerful recognition so far that streaming media competition is affecting its user growth.
Usually when talking about competition, Netflix claims to compete with many companies, but other streaming media services do not pose much threat. Netflix often argues that streaming media viewing time is enough. It did so again this quarter, pointing out that Netflix still spends less than 10% of the time on U.S. television screens. Michael Nathanson, a media analyst at Moffett Nathanson, said that admitting that competition is affecting Netflix’s subscriber growth is a bit subtle and is a unique and bold statement for the company. This is a signal that the streaming media giant has finally felt some competitive impact of other services, such as Disney +, HBO max of Warner Bros., paramount + of Viacom CBS and peacock of NBC global.
“They usually think it’s just a temporary phenomenon,” Nelson said of Netflix’s opponents. Competitive pressure is particularly important in the United States and Canada. Netflix just raised its price last week, including raising its standard plan from $13.99 to $15.49 a month. If competition really starts to erode some growth, it will increase the risk that price increases may increase the loss of customers.
Netflix content is still in high demand. In the shareholder letter, the company pointed out that among the 10 programs with the highest search volume in the world in 2021, 6 belong to Netflix. It was the biggest success of the year in the squid game.
Promoting revenue growth by raising prices
Generally speaking, when Netflix releases its earnings, Wall Street will directly focus on its user growth. But this time, investors and industry observers saw something new: Netflix’s revenue forecast after raising prices.
Last week, Netflix raised its subscription fee standards in the United States and Canada for the first time since 2020. Netflix did not raise prices globally. Last month, the company even lowered prices in India. Netflix has always regarded the Indian market as a market crucial to its growth.
Netflix believes that the rising cost of content is the main reason for raising subscription fees. Although Netflix has been investing heavily in content, growing streaming media competition is driving the company to release a large number of new programs and films to the market. At the same time, Netflix canceled programs faster than ever. Producers working with Netflix say the new show takes less time to prove itself than in previous years.

Andrew hare, senior vice president of research at media consultancy Magid, said: “Netflix clearly believes that it still has the pricing power to do so and provides value for money services.” Hale believes that Netflix understands that the U.S. and Canadian markets are maturing and the competition is very fierce. As a result, it is trying to offset the slowdown with higher subscription prices. “Raising prices is just a lever they can continue to pull now, although I’m not sure how long they can pull,” Hale said
The financial data are in line with expectations
According to the financial report, Netflix’s revenue in the fourth quarter was US $7.709 billion, an increase of 16.0% over the same period last year, which was basically consistent with Wall Street’s expectations; The net profit was US $607 million, an increase of 12% compared with us $542 million in the same period of last year; Diluted earnings per share was $1.33, better than $1.19 in the same period last year, exceeding analysts’ previous expectations. According to a Thomson Reuters survey, Wall Street analysts on average expected Netflix’s fourth quarter earnings per share to be $0.82.
For the first quarter of the current fiscal year 2022, Netflix expects the number of new streaming service users to reach 2.5 million. Netflix also expects that the revenue in the first quarter of 2022 will reach US $7.903 billion, a year-on-year increase of 10.3%; The operating profit is US $1.765 billion and the operating profit margin is 22.3%; Net profit was $1.304 billion, or diluted earnings per share of $2.86. On average, market analysts currently expect Netflix’s first quarter revenue to reach $8.08 billion and diluted earnings per share to be $3.45.
Many analysts expect that most of Netflix’s growth in the coming year will come from international audiences. In order to attract new audiences, Netflix is expected to invest more money in creating content in these markets. Michael Pachter, an analyst at wedbush securities, said: “this international growth will increase the pressure on the company to develop more and more localized content, and the cost of content will continue to rise with the growth of users.
Change corporate governance
Netflix said in its fourth quarter earnings report released on Thursday that it proposed to cancel the rule that two-thirds of the voting rights are required to change the members of the board of directors. The proposal will be put forward at the next shareholders’ meeting. Netflix said in a letter to shareholders: “although our current governance structure has provided very good services to shareholders and maintained significant growth for some time, we have clearly proved our business model. Therefore, Netflix’s board of directors has decided to develop to a more standard governance structure of large cap stocks and will put forward several reform suggestions at the next annual meeting.”
In addition to abolishing the absolute majority rule, Netflix also said that it would allow shareholders to hold special meetings and change the voting criteria of directors in undisputed elections. For years, Netflix shareholders have demanded that this ratio be changed to a simple majority. Since 2013, investors have supported the proposal to cancel the absolute majority requirement at the annual general meeting five times, but the company has repeatedly opposed this effort.
Netflix said in its power of attorney before the shareholders’ meeting in June last year: “we believe that in the current dynamic business environment, the absolute majority voting scheme we have will help to improve the stability of operations, while still maintaining a sufficiently low proportion so that shareholders have a voice on issues with strong consensus. We will continue to monitor and evaluate this issue.” Seven months later, Netflix finally reassessed this. (compiled by Tencent technology / Wuji)