New Grown-ups In The Room

Michael Hedges October 29, 2018 Follow on Twitter

Years ago, so far from today most people can’t remember, the legends of digital creation told everybody who would listen that nothing would be the same. They were, largely, ignored. Bit by bit - byte by byte - their message turned true. People liked many of these digital marvels and discarded much of what had come before without overly intellectualizing their decisions. This made some folks absolutely crazy.

Subscription video on demand (SVoD) service Netflix recently released its Q3 earnings - and much more. Netflix has 137 million paying customers worldwide. Ten years ago it had less than 10 million. In the recent quarter the company added seven million new customers, 1.1 million in the US and 5.9 million elsewhere except China. Anybody paying attention noticed that the new numbers were much better than expected.

The day before the Netflix quarterly announcement several Wall Street heavyweights, including Goldman Sachs, cut their share price forecasts “to reflect the contraction in broader internet multiples,” reported CNBC (October 15). For those in the real world, they thought the Netflix share price - reflecting financial confidence - should be punished along with the great swath of publicly traded internet technology companies. Like most of the big, well-known tech-oriented publicly-traded media-infused companies - appropriately referred to as the FAANGs (Facebook, Apple, Amazon, Netflix and Google) - the Netflix share price has been battered in recent months. Perhaps more so because it carried a lot of debt. Well, that came to a halt. After the Q3 subscribers report the Netflix share price jumped 12%. All of the FAANGs touch, at the very least, television.

“I think the window is closing,” said UK broadcaster ITV chief executive Carolyn McCall to The Guardian (October 21), a week after the Netflix quarterly results were announced. Competing with Netflix, she said, “is not going to be easy. We know it’s not slam dunk. If we don’t do it we will never do it. We have to take the plunge.”

In the UK, Netflix has about 10 million subscribers, said The Guardian, with Amazon Prime Video a bit more than 7 million. Pay-TV provider Sky plc, an older business model, has 9.6 million subscribers, not including about 1.5 million customers for its Now TV SVoD platform. US telecom Comcast, owner of broadcaster/producer NBCUniversal, effectively closed its acquisition of Sky plc in early October.

Amazon Prime Video leads the German subscription/pay TV market with 9.9 million customers, said a Q3 report for SVoD provider Cirkus by UK market researcher Ampere Analysis. The report also showed 5.1 million Netflix customers. Separately, pay TV provider Sky Deutschland had 5.2 million German-language subscribers at the end of Q2, which includes 400,000 in Austria. Perhaps more interesting is more than half of broadband customers in Germany subscribed to two or more SVoD services, 12% four or more. It is similar in all developed markets and becoming so in developing markets, too.

“Someday there will have to be competition for wallet share; we’re not naive about that,” said Netflix chief executive Reed Hastings in the October earnings call, quoted by the New York Times (October 26), he said. “But it seems very far off from everything we’ve seen.” Explaining it all, he added: “We actually compete with sleep. And we’re winning!”

After being forced to admit that Netflix is reeling in customers, stock traders focused on the company’s debt, recently swelled by a US$2 billion bond issue to pay for more original series productions. Of course, all publicly traded companies live or die on debt. The former attract investors, the latter do not. It’s called high finance and the reason chief executives at banks are paid a zillion times more than school teachers.

Original content for local markets is and always will be a sticking point as the big US and UK based TV operators, streaming and otherwise, continue reaching to international markets. At the Munich Media Days (Medientage München) Netflix VP for creative international originals Kelly Luegenbiehl announced five new German-language series “on the one hand unmistakably German and on the other hand creating a universal connection with viewers around the world,” quoted by media portal DWDL.de (October 25).

Failing to wound, big business watchers dove deeper into Netflix Derangement Syndrome calling the company a terrible place to work, reported the Wall Street Journal (October 25). There’s pressure. People get fired. Alas, Bloomberg’s Joe Nocera (October 26) observed “the grown-ups it hires can handle it.”