For Netflix, ‘the good old days may be gone,’ analyst says

Santosh Rao, Head of Research at Manhattan Venture Partners, joins Yahoo Finance Live to discuss Netflix's fourth quarter earnings, the need to gain more subscribers, and competition in the streaming space.

Video transcript

EMILY MCCORMICK: Netflix just moments ago reported fourth quarter subscriber growth and an outlook for first quarter subscriber growth that missed estimates. And the stock is down sharply in late trading. Here to discuss more is Santosh Rao, Manhattan Venture Partners head of research, and Yahoo Finance's own Alexandra Canal. Santosh, thank you so much for joining us. Netflix does, as we know, typically trade after earnings based on those subscriber numbers. And those did miss estimates. But aside from that headline number, what were your big takeaways from this report?

SANTOSH RAO: Yeah, I think as expected, fourth quarter was good. I mean, they beat everything across the board, which was expected given the slate of content that they had. But the first, the subscriber number for first quarter plays right into the hands, right into the fears that competition is growing. And they may not be able to compete. The good old days may be gone. Now they will really have to grind it out, compete neck to neck in terms of quality of content, and get subscribers out there.

So the next incremental subscriber is going to be hard to get. That we know. So in the long run, it's still well positioned. But near-term, I think the growth story has to be clarified. How are they going to do it when subscribers are slowing down? So I that's the biggest takeaway at this point. Let's see what they say in the commentary.

ALEXANDRA CANAL: Yeah, Santosh, outlook for 2021 clearly very disappointing to investors. But we've seen this slowdown in subscriber growth the past few quarters. In fact, we're nowhere near those numbers that we saw in 2020. And yet, Netflix did raise those prices. So in your view, how can we reach the peak at least in the United States? And how should Netflix adjust, or in your words, clarify its growth strategy moving forward? Because the emphasis seems to be more on international markets at this point.

SANTOSH RAO: Yes, and that's been the story. International is a big part. I think 40% of their net ads come from APAC region. So I think that's a big part, even though there are low ARPU numbers. But the growth is there. So I think that's the thing. I think in the US, we'll have to see if the price will stick. There is a cap on how much they can raise. There's competition right now. It's full on now. It's game on. All the players are full, are out there. And so they're executing. Netflix continues to execute well. But it's just that the options out there for subscribers a lot more.

So they will have to manage everything, manage their rollout, manage their execution. And just keep getting out good content. In the end, they will succeed, which they will, which we know they have a lead on that end. But they will have to continue to execute and keep on giving new content.

ADAM SHAPIRO: But when we talk about growth with this new content overseas, and a lot of faith that they'll be able to do that, a show like "Ozark", which I'm thrilled is coming back tomorrow, I can't wait to see how they finish this out, is that going to play so well? I mean, that's very-- I mean, if you're a US citizen or maybe even in an English speaking country, you might be able to relate to it. But is that the kind of thing that, say, in India or even in China, that people are going to say, got to watch this? Got to get Netflix?

SANTOSH RAO: Not necessarily. I mean, it doesn't translate that easily. But there is a big English speaking population in all those countries. So I think it would continue to do well there. It will continue to grab some eyeballs there. But it won't be as big as the English speaking world. They have their own localized content, which is very good, very catchy. And Netflix has been very good at that on executing and scaling up their international content. So I think they have competition there.

But like I said, most of the countries now have a huge or growing English speaking audience. The subtitles are pretty good. So I think you can come along. You can follow along. If the series is good, you can pretty much be part of the flow there. So-- it's too early to tell, but I'm sure it can do well.

EMILY MCCORMICK: Santosh, I want to ask a little bit of a wonkier question here. And that is, is net subscriber additions going to be the best way to continue assessing Netflix's business? Because especially as Netflix matures in North America, this is inherently going to slow down even as that total subscriber number is still well ahead of the competition at 222 million. And we've seen this with tech companies from Apple stopping its unit sales, reporting its unit sales that is, of iPhones, Twitter switching to monetizable daily active users for its reporting metrics. Do you expect something similar to come out of Netflix?

SANTOSH RAO: Absolutely. I think it's not going to be the absolute number. It's going to be more about the engagement level, how many hours are there? How many people-- how many hours are the subscribers glued to their shows? I think that's going to be a big count. And I think they did mention something like that in 3Q where they're going to talk more about the engagement out there in terms of the user base. I think that's definitely the way to go. Now you're hitting the law of large numbers. They have a lot of competition out there.

The switching costs are not that many. People go in and out. So you need to manage churn very well. You need to keep the people engaged, subscribers engaged. And that's why you see Netflix getting into gaming, or want to. They bought the indy game company studio. They want to get that option there. Also they're not big there. It's still early. But they want to keep the user engaged and in their ecosystem. And that's the game right now. It's the quality of the subscriber, quality of the engagement, or the level of engagement that's going to be a big thing rather than the absolute number of subscribers.

ALEXANDRA CANAL: And Santosh, real quickly here, we only have about 20 seconds. But obviously there's a lot of players in this space. And we're starting to see the winners and the losers. Just yesterday, Google killed YouTube Originals after more than six years. Is this a sign of more drop offs or consolidations to come in this space?

SANTOSH RAO: Absolutely. I mean, right now, everyone's getting in there. Not everybody is going to succeed. You need to scale up. And there are a lot more variables right now. It's still early days in streaming, especially when you consider the global market. So you're going to see a lot of-- you will see some kind of consolidation, some kind of drop off, some kind of specializations, and kind of niche players out there.

So you're going to see a lot of back and forth in there, a lot of jockeying for position. But this is early days, like I said. Netflix is the incumbent leader. They're executing very well. It's their market share to lose. But they will be a tough player to beat. They're out there. But the players are coming on strong. Everyone wants streaming. Because that's the future.

EMILY MCCORMICK: All right. Santosh Rao is Manhattan Venture Partners head of research, and Yahoo Finance's own Alexandra Canal. Thank you both so much for being here again.