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Tarja Hempton
Netflix was conceived in 1997 by Reed Hastings (the current CEO) and Marc Randolph. Both had previous ventures in the West Coast tech scene, Hastings was the owner of debugging software firm Pure Atria, while Randolph had co-founded and then sold MicroWarehouse for $700 million.
Originally a DVD-rental service, in the same vein as Blockbuster, Netflix broke ground with its mail order service. It introduced a subscription model at the turn of the millennium, which allowed subscribers to rent as many DVDs as they wanted, without incurring any additional costs which were the bane of many Blockbuster-fans lives.
Even before the streaming service, Netflix was focused on recommendation algorithms and unique experiences through its website. Even with these advances in technology, Netflix was hit hard in the dot-com bubble and was offered $50 million by Blockbuster in 2001.- Advertisement -Efficient, Effective User Acquisition Made EasyWondering how to increase engaged, qualified new users? Get in touch with our team of user acquisition experts to discuss a custom outcome-based strategy.
It took a few years for the streaming service to make inroads, but once it did Netflix pivoted to a platform only approach, canning the DVD-rental service and launching Netflix worldwide. Today, only citizens in North Korea, Syria, China and Crimea are denied the binge-watching pleasures of the streaming service.
But in terms of awards, the first Emmy Netflix ever won, in 2012, is perhaps the most illustrative: an Emmy Engineering Award, given to individuals or organisations that have profoundly changed the way we watch television. Netflix, it is fair to say, has profoundly done this.
As Netflix has grown in revenue and subscribers, it has enticed others to copy its formula. Amazon launched its Prime Video subscription service at around the same time and has been a heavy spender, as it looks to compete with Netflix for online eyeballs.
To combat this, Netflix launched a cheaper ad-supported tier, to entice users who would not pay for Netflix otherwise. It also considers the ad-supported tier as a way to carve out a new source of revenue, with subscription growth drying up.
Last spring Netflix executives projected a strong second half of 2021. And the company delivered, although not to the extent that the dominant streaming service had hoped. Now Netflix has set relatively low expectations for the start of 2022.
Also, while more than 90% of the subscribers Netflix added in 2021 were outside the U.S. and Canada, the company is once again growing in its most mature market. In fact, Netflix added 300,000 more subscribers in the U.S. and Canada in Q4 2021 than in Q4 2020.
First, Netflix has once again hiked its subscription prices. The company also raised its prices last year, which correlated with slowing subscriber growth and even shrinkage in the U.S. and Canada. Moreover, the company may not give subscribers as much bang for their bucks until March, which is why Netflix is projecting to add 1.5 million fewer subscribers in Q1 2022 than in Q1 2021.
In terms of subscribers, or members as Netflix calls them, Netflix reported they had grown to 232.5 million global streaming paid memberships, including 1.75 million net new additions during the quarter, a 4.9% increase year-over-year. The company said their first quarter revenue and operating profit were in line with their expectations.
Though the majority of viewing is still on linear TV, this provides growth opportunities for streaming subscription services like Netflix. Using data from multiple sources, the chart below shows that Netflix and YouTube are leading the pack in terms of streaming services with Disney and Hulu next in the U.S. and the U.K. Netflix says this engagement is important in terms of subscriber acquisition and retention.
Their new ad-supported plans allow the streaming subscription service to offer a lower price point for cost-sensitive consumers or those who want to subscribe to multiple services and are willing to watch a few ads to lower their overall costs.
This time last year, there were many naysayers who were dismissing Netflix as a major player because their growth dropped after record subscriber increases during the pandemic. No one can sustain that type of growth forever. As a result, Netflix stock dropped, and the company had to make operational adjustments, including several rounds of painful layoffs. At that time, we said Netflix will survive this.
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Investors' positive reactions are attributable to the quarter's revenue and net paid subscriber additions surpassing Wall Street's consensus estimates, along with bottom-line guidance for the first quarter of 2024, easily exceeding analyst expectations. Here is an overview of Netflix's fourth quarter, along with its outlook, centered on six key metric categories.
Revenue growth was primarily driven by the increase in average paid subscriptions, with a 1% rise in average revenue per subscription also contributing to growth. The company attributed the robust top-line growth to its paid-subscription-sharing offering (part of its password-sharing crackdown), its recent price changes, and the strength of its business in general.
In Q4, paid net subscriber growth was 13.1 million, up from 7.7 million in the year-ago quarter and up from 8.8 million in the prior quarter. This result crushed the 8.7 million analysts were expecting. Netflix ended the quarter with 260.3 million global paid subscribers, up 13% year over year.
Netflix added paid subs in all four of its regions, including in its U.S./Canada region, which is more difficult to do because of the company's high penetration rate. It gained 2.8 million new paid subs in this region, bringing its total to 80.1 million.
In Q4, operating income increased 172% year over year to $1.50 billion, translating to the operating margin (operating income divided by revenue) rising from 7% to 16.9%. Operating results were notably better than management's guidance for an operating margin of 13%. The company attributed this beat to the stronger-than-expected revenue and its lower-than-planned spending.
On Tuesday, Netflix said subscribers increased by 8.51 million between October and December to hit 203.66 million total, according to its Tuesday report on fourth-quarter results. That beats Netflix's October guidance to add 6 million new members. Analysts on average expected about 6.1 million member additions, according to Thomson Reuters.
Investors were flocking to Netflix stock because of the unexpectedly strong growth, as well as news that Netflix financials are solid enough that the company will consider share buybacks and will stop borrowing money to fund its day-to-day operations. Shares jumped 14% percent to $571.18 in recent trading Wednesday.
Though Netflix's growth slowed to a crawl in the previous quarter, the latest results cap a year of soaring popularity for Netflix, as many households came to grips with entertaining themselves more at home. Netflix added more new subscribers in the first three months of the year, for example, than it ever had before, record growth that was taken as a bellwether for the popularity of streaming video during the coronavirus pandemic. With the eye-popping size of its original-programming pipeline and its stream-at-home model, Netflix was ideally positioned to keep serving up new shows and movies to people stuck at home and desperate for entertainment.
Still, Netflix had already shown signs that its growth was chugging along during the latest period. In October, it ended its long-standing practice of offering month-long free trials to new subscribers. And later that month, Netflix raised prices in the US for both its most popular, standard plan and its higher-end premium plan. The price bump, likely unwelcome by some subscribers, was widely anticipated by investors and analysts to come sometime in 2020 or possibly 2021. But the fact that it came earlier rather than later suggested Netflix was confident enough in its growth trends to start charging members more in spite of a myriad of new rivals.
"It is still striking to see how the COVID-19 pandemic has been nothing but a major boon to the company's operations," MoffettNathanson analyst Michael Nathanson said in a note about the results. "As much of the world is still shuttered in their homes with nowhere to go and nothing to spend their money on, consumer adoption of streaming services has been accelerated by years.... While the pandemic clearly worked to Netflix's advantage, the company had been preparing for a streaming-first world for more than a decade now."
Netflix's unprecedented worldwide scale is widening the audience for programming that, conventionally, would never be considered sure-fire hits. For example, Netflix's latest hit show is Lupin, a French-language heist series pulling in audience numbers unseen for a Netflix original show since The Witcher in December 2019. Netflix said Tuesday that it projects Lupin will be watched by more than 70 million accounts within its first four weeks of release. The Witcher -- Netflix's most-watched original series since the company started reporting these stats -- hit 76 million accounts.
But Lupin's appeal is crossing language barriers, seemingly making it the most popular non-English-language titles on Netflix yet. Previously, La Casa de Papel -- a Spanish-language crime thriller titled Money Heist for English-speaking audiences -- had reigned as Netflix's biggest non-English-language show. But La Casa de Papel's third season was watched by roughly 65 million accounts, compared with Lupin's projected 70 million.
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