Netflix Added 5.1 Million Subscribers; Can We Talk About What Matters?

Netflix, which has seen share prices rocket back to pandemic-era heights over the past few months, reported another 5.1 million subscribers today, puffing up its global customer base to nearly 283 million. That keeps it easily as the biggest streaming service on the planet. But so what?

Yes, the number topped Wall Street analyst estimates by 1 million new subscribers, along with beats on top- and bottom-line earnings. And yes, it represents a 42-percent decline in subscriber adds compared to the same quarter a year ago. But don’t get too focused on that. You’re missing what matters as Netflix evolves in this post-Streaming Wars era.

Netflix, as a CNBC commentator noted today, could easily juice its subscriber totals any time it wanted. Just introduce a $2.99-a-month tier, and watch the signups flow in. The company just wouldn’t make as much money, which is what matters.

Instead, Netflix is trying to force Wall Street to stop worrying about how many subscribers it has. The company even says it will stop reporting the subscriber-add figure altogether in the next few quarters.

At the same time, Netflix has begun reporting every six months, how much people are watching each of its many thousands of series, specials and feature-length shows (once called movies). That helps show what’s working on the service, and how engaged viewers are more generally in what its providing.

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Subscriber adds mattered a lot 10 years ago, when Netflix was quietly transforming how people watched “TV,” while trying to prove its viability to investors and the studios that were licensing their shows to it.

Now, no one doubts that Netflix is a viable organization. And after a few years of freeze-out by studios trying to build their own streaming services, now they’re busy licensing their library shows to Netflix, hoping for another Suits-style cultural revival.

In some ways, Netflix feels like the last viable organization in Hollywood not known for making billions on something else (Apple, Amazon, Alphabet).

That’s because here’s what Netflix is doing: making money, despite years of naysayers who doubted the company’s “flywheel” strategy could ever work before Netflix went broke.

The flywheel (borrow money to spend heavily on a wide range of content; make your subscribers happy and attract more; generate more money; make more shows; occasionally raise prices; repeat ad infinitum) seems to be fly-wheeling along.

The company earned $2.36 billion, or $5.40 per share, on $9.82 billion in revenue, which was up 15 percent year over year.

The result is a boost in free cash flow, to $2.2 billion this quarter, even as competing services from traditional Hollywood studios (Disney+, Paramount+, Warner Bros. Discovery’s Max, Comcast’s Peacock) struggle to break even or continue to lose uncomfortably notable sums.

Analysts still pronounced themselves uncomfortable with the slower subscriber-add rate.

Part of Netflix’s “problem” is that its home market, the United States and Canada, is pretty much tapped out. Just about everyone who wants a Netflix subscription already has one, now that the company has cracked down on password sharing.

That means growth needs to come from overseas, where monetization is more challenging, depending on a given market’s economy.

But at this level, concerns about sub growth somewhat miss the point, particularly as the company pushes more engagement (now up to 2 hours a day per customer, the company said) and builds out its ad-supported tier. With ads, the longer a customer watches, the more money the company makes, on top of the subscription revenue.

If analysts want something to kvetch about, it should be how fast that ad-supported tier is growing revenue, never mind subscribers. That’s likely to be a lucrative source of revenue growth in coming quarters.

To further calm analyst and investor fears, Netflix does have a few likely bottom-line boosters coming this quarter.

For one thing, the sequel to Netflix’s all-time global hit Squid Game is coming. That should draw some attention, and maybe some new subscribers.

For another, the company carved out an unlikely deal with the NFL, traditional TV’s most popular programming source, to carry two games on this year’s mid-week Christmas Day. That could be huge for a set of sports fans who might have previously ignored Netflix.

Finally, despite calls from some analysts, Netflix did not announce a price hike in its most lucrative markets. Given the pushback on inflation by many consumers in many sectors in recent months, perhaps it’s wise to be a little slow to hike prices right now. Regardless, stop worrying about subscriber adds and look where it matters, on the bottom line.