The streaming wars are over. Netflix won: Analyst explains

Netflix (NFLX) posted its first-quarter earnings, revealing an addition of 9.33 million new subscribers in this quarter, easily beating Wall Street expectations of 5.48 million. The streaming service did, however, share second-quarter guidance that fell below expectations. In addition, the streamer announced that starting next year, it will end its reporting of quarterly membership numbers. Should this worry investors moving forward or is there more at play?

Bloomberg Intelligence Senior Media Analyst Geetha Ranganathan joins Market Domination Overtime to give insight into why she has declared Netflix the winner of the streaming wars.

Ranganathan explains her stance:

"To a great extent, the streaming wars are kind of over, I think Netflix has kind of won it. And, yes, you're right... this shakeout has been happening in a pretty small way. I think it's going to be happening in a much more aggressive way. We're already seeing talks of consolidation whether it's with Paramount (PARA) or the smaller players, so that obviously is going to play out. We're seeing Netflix also take a complete shift in its content strategy. We used to see them be much more bold with their originals.. There is, of course, now this whole phase of content rationalization... If you look at some of their content titles... they do still have a great mix of their own original content, but we're also seeing a lot of licensed content come on this service."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Nicholas Jacobino

Video transcript

- All right. Netflix's first quarter results are out. Gain stock down about 5% in after hours trade. Geetha Ranganathan, Bloomberg Intelligence Senior media analyst joins us now to discuss. Gita, just curious for your initial thoughts here on the quarter.

What you saw in the numbers and where this sits. You know, where Netflix sits at its point in the story this post COVID acceleration in subscriber growth. That story they've been telling.

GEETHA RANGANATHAN: Yeah, as you rightly pointed out, expectations were really high coming into this quarter and obviously this is a huge blow out. Almost double the expectations that the Street was expecting in terms of subscribers over 9 million subscriber adds.

But I think what is really spooking the street right now and we're kind of seeing that in this instant market reaction is that they are going to stop issuing any type of subscriber metrics starting from the first quarter of 2025. And I think people then generally view that as growth kind of plateauing out. And so I think that's where a lot of the nervousness is creeping in right now.

- And so, do you read it that way as well, Geetha? That that's what the implication is?

GEETHA RANGANATHAN: I think this has been the concern all along, Julie. Because, you know. Yes, they did have those two big growth drivers in terms of that low priced advertising tier. As well as the password sharing crackdown. But everybody was worried about.

OK, yes, you're going to be able to capture a lot of the low hanging fruit. But at some point like, this growth runway has to end. And I think when they are signaling that or when they're saying that they're not going to report subscriber metrics anymore in a year's time. I think that kind of signals that, OK, this is going to become then a low growth company.

It becomes harder to model because you know, it's otherwise, it's a really simple calculation, right? It's number of subscribers into the price you pay per month. And now it just becomes much harder.

- And Geetha, I'm also curious how you think about Netflix in the context of a streaming environment that is trying to figure out what's next here. I mean, the Netflix model forced all of these production houses to decide they wanted to be content distributors. That has had plenty of challenges.

Is Netflix may be poised to pick up where other folks are going to decide to either shut down their services, go back to the arms dealer model. Like, is Netflix may be going to try to frame itself as gaining share winning in a market that is,

I don't want to say it's ending, but has certainly figured out that the huge future of everybody making billions of dollars on streaming services is not going to come to fruition the way that I think a lot of these operators assumed.

GEETHA RANGANATHAN: Yeah, I think you to a great extent. The streaming wars are kind of over. I think Netflix has kind of won it. And yes, you're right, there absolutely is. This shakeout has been happening in a pretty small way. I think it is going to be happening in a much more aggressive way.

I mean, we're already seeing talks of consolidation. You know, whether it's with Paramount whether it's with some of the smaller players. So that obviously is going to play out. And we're seeing Netflix also actually take a complete shift in its content strategy. You know, we used to see them be much more kind of bold with their originals.

There is, of course now this whole phase of content rationalization. And what they're doing even, if you look at some of their content titles is yes, they do still have a great mix of their own original content. But we're also seeing a lot of licensed content come on the service.

You know, we're seeing them get movies, get older TV shows from, you know Max, from all of the other players actually. And so that definitely speaks to the dynamics in the industry kind of changing pretty dramatically.

- Geetha, in addition to I mean, as you mentioned the subscriber number was very strong. Maybe, disappointment here that the quarterly numbers are not going to be reported anymore. What about the second quarter revenue forecast? That seems to be a little bit light. Is that of concern as well?

GEETHA RANGANATHAN: Not at all because, again, what we were expecting was there obviously is that this whole revenue re-acceleration is the big narrative for this year along with good momentum and subscriber numbers. And we're seeing, again, the guidance that they've provided again, points to revenue re-acceleration from the first quarter into the second quarter.

So I think that pretty much is on intact. And then, Julie, the other big thing to highlight was that they actually guided up. In terms, of their profitability and operating margin. So we were first expecting a 300 basis or they were rather expecting a 300 basis point increase to 24%. They're now saying 25% operating margin.

So clearly this story is really delivering when it comes to profits, when it comes to margins. And eventually, free cash flow.

- And you know, Geetha, we've seen Netflix be quite aggressive in terms of pricing over the last couple of years. You know, they write in their letter success in streaming starts with engagement.

So I guess, everyone can debate whether that's true or not, but it seems like they are comfortable perhaps, teasing that they might be even more aggressive when it comes to pricing in the years ahead. Is that consistent maybe with this new phase of the Netflix story and the streaming story more broadly.

GEETHA RANGANATHAN: Absolutely. I mean, this is really where all of the growth is going to come from. You know, they've kind of hit this wall in a way when it comes to subscriber numbers. Now it's really going to be about their pricing power. And they're doing everything that they can to see that they can maintain that pricing power.

Obviously, engagement is very strong. If you look at household engagement. You know, a Netflix member on average views about 2 to 2.5 hours every night of Netflix content. Now that is strong engagement that gives them pricing power. And then, they're adding more and more content. Live sports is an area that we think they're going to get into.

This not only helps them with their pricing power, it also helps them really scale up their advertising business. And we're kind of seeing them dip the toe, dip their toe. They obviously did that huge deal. The $5 billion deal with WWE. That's kind of for quasi sports. I would say, but then now you have The Mike Tyson, Jake Paul fight that's coming up again.

Helps them really gauge interest for live sports. And then, who knows maybe, there will be a dark horse with the current NBA deal also.

- That would be interesting indeed. Geetha, thanks as always, for your insight. Really appreciate it.

GEETHA RANGANATHAN: Thank you.