Netflix has cause to worry even if it performed better than it expected this quarter, adding twice as many subscribers as it expected amid the COVID-19 pandemic. Nearly all of its production is on hold, and the company’s dubbing efforts for international markets is stalled too. But still, Netflix can pull through — the company has a formidable stockpile of content, thousands of hours’ worth of shows and films. “Since we have a large library with thousands of titles for viewing and very strong recommendations, our member satisfaction may be less impacted than our peers’ by a shortage of new content,” CEO Reed Hastings said on the company’s earnings conference call. In 2016, Netflix’s then-Chief Product Officer wrote a paper estimating that the company’s recommendation system was saving them $1 billion a year.
Netflix’s regular strategy is its COVID-19 strategy
- Most of Netflix’s work this year is already done: Another key practice apart from recommendation algorithms that makes Netflix uniquely prepared to tackle the pandemic is their production schedules — the company isn’t pushing back any of their original releases for this entire year even though production has halted. “The one thing that’s maybe not widely understood is we work really far out relative to the industry because we launch our shows all episodes at once. And we’re working far out all over the world. So our 2020 slate of series and films are largely shot and are in postproduction remotely in locations all over the world,” Chief Content Officer Ted Sarandos explained in this quarter’s earnings call.
- Subscriber additions will slow down later this year: But the company still has reason to stay guarded; even with global growth in subscriptions, the company’s revenue isn’t growing at the same pace. Indeed, the company had forecasted revenue this quarter of $5.73 billion, and ended up making $5.76 billion. “Intuitively, the person who didn’t join Netflix during the entire confinement is not likely to join soon after the confinement,” Hastings said. “Therefore, we currently guess that Q3’20 and Q4’20 will have lower net additions than last year due to these effects.”
- Postproduction and animation has gone remote: In very little time, Netflix was able to make postproduction of titles that it has finished shooting digital. “And it’s just an incredible testimony to the innovation that within a few — literally within a few hours, but within — certainly within a few days of the shutdowns, we had production up and running remotely, postproduction up and running remotely, animation up and running remotely, pitch meetings happening virtually, writers’ rooms assembling virtually,” Sarandos said.
Netflix will have revenue problems
- Foreign exchange will be an issue: Because of the economic troubles associated with the pandemic, most currencies have weakened against the dollar. “Despite paid net additions that were higher than forecast, revenue was in-line with our guidance due to the appreciation in the US dollar vs. other currencies,” the shareholder letter said. “As an example, the price for our standard plan in Brazil is R$33, which used to be $8.5 last year but now is $6.5 based on April 2020 F/X rates, so we have a ~25% decline in US dollar average subscription price from Brazil, which offsets strong membership growth.” This will be particularly problematic for markets like India, where the rupee’s value has so far depreciated against the dollar by 7% until now.
- No price increases: Interestingly, the company ruled out any price increases, in spite of these foreign exchange conditions. “Obviously, past recessions, folks tend to spend more time at home and with home entertainment. It’s why they watch their budget in those times,” Chief Financial Officer Spencer Neumann said in the earnings call. But this is something that Netflix might have to look into soon to keep cash flow going outside the US after the pandemic.
- Netflix can’t have a detailed plan for COVID-19: When asked what the company was doing to plan ahead for the coming months, Hastings pointed out that nobody can make detailed plans without knowing how the pandemic will play out. “I think [to] have a planning model, you have to have a model of COVID and when are certain treatments coming online, how broadly are they distributed, when are vaccines coming online, how quickly can they be manufactured. And we don’t know any more than anybody else on those big elements, and that is the most significant aspect,” he said.
- Stranger Things: Netflix implied in its letter that not having new seasons of hugely popular shows like Money Heist and Stranger Things would impact its revenue. “Last year we had new seasons of Money Heist and Stranger Things in Q3, which were not planned for this year’s Q3,” the shareholder letter said.
- Subscribers added in Q1 2020: 15.77 million (22.8% YoY growth)
- Revenue for Q1 2020: $5.77 billion (27.6% YoY growth)
- Operating margin: 16.6% (~63% YoY increase)
Did Netflix miss a pricing opportunity in India?
This year, Netflix stopped largely stopped offering free trials in many countries including India. The company’s pricing hasn’t changed since it launched in India, save for the addition of a standard definition mobile-only plan, so could it have missed an opportunity to onboard more users by not offering an extended free trial, or lower pricing? That depends. For them to take such aggressive steps to onboard customers, it makes sense to make a solid guess if customers will stay even if they have to start paying more.
Even so, a price reduction in India may not be so unthinkable; on its Rs 199 mobile plan, Chief Product Officer Gregory Peters said during the earnings call, “from a revenue perspective, [the mobile plan is] neutral to positive, which we think is a really great position to be in the long term for the business.” There’s a yawning gap between a 199 rupee mobile plan and the next cheapest 500 rupee plan that allows other devices, without a significant increase in costs for Netflix. So the company might have missed a pricing opportunity in a potentially significant market right before a pandemic tightened budgets across the board, reducing both consumer appetite for spending and presumably Netflix’s own appetite for diversifying its pricing strategy in a highly volatile situation.