Should Netflix Be Looking Over Its Shoulder at Disney+ After Slow Q1 Growth?

Inside Byron Allen’s New ‘Super-Hyper-Local’ Free Streaming Service

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What Netflix’s Slow Q1 Growth Means – for Streaming Giant and Rivals Like Disney+

The streaming giant fell 33% short of its first quarter subscriber goal on Tuesday

Is Netflix starting to feel the heat from its new group of streaming competitors? While the runaway leader in streaming still holds a massive lead over its newer rivals, Netflix saw its growth slow enough in the first quarter to not only miss estimates, but offer only tepid forecasts for next quarter.

The streaming giant on Tuesday reported that it added 2 million fewer subscribers than it expected in the first three months of 2021. Netflix added 4 million accounts globally in Q1, bringing the company to 207.6 million subscriptions overall. That came in below the 6 million new accounts that Netflix — and Wall Street analysts — had projected.

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Netflix’s U.S. market share has taken a hit in the last year, which can be expected since both HBO Max and Peacock debuted in 2020, coming just a few months after Apple TV+ and Disney+ hit the market at the end of 2019. Even as it added a company-record 36.58 million new accounts globally in 2020, Netflix’s U.S. market share has been sliced from 29% to 20% since the start of 2020; that’s a 31% drop in the last year.

Disney+ has cut Netflix’s lead in half by crossing the 100 million subscriber threshold in less than 18 months, while HBO Max figures to see a sizeable boost this year from its day-and-date premieres of Warner Bros. films like “Godzilla vs. Kong” and this weekend’s “Mortal Kombat” reboot. AT&T reports its earnings on Thursday, while Disney+ reports next month.

“The quick growth of Disney+ — which is already past 100 million subscribers, reaching half of Netflix’s size in less than two years — definitely puts a lot of pressure on Netflix, and they should be looking behind them and watching what Disney is doing,” Sarah Henschel, senior TV and online video analyst with Omdia, said. “In my opinion, Netflix, Amazon and Disney are just the ‘Big 3’ that are going to be household staples” moving forward.

Paul Hardart, a former Warner Bros. executive and current head of the Entertainment, Media and Technology Program at NYU agreed Netflix should looking carefully at Disney, but that it’s miss on subscribers likely isn’t a sign its other competitors are huge threats. “They definitely have headwinds from Disney, certainly, but I think less so from its other competitors,” Hardart said. “But they now have competition, which they haven’t had.”

From a macro level, Hardart said there is still plenty to please Netflix investors. The streamer brought in $7.16 billion in revenue — up 24% year-over-year — during the first quarter, and the company’s earnings per share of $3.75 easily topped Wall Street’s expectations.

“Though they missed their subscriber number — which is probably the most important metric — they’re still managing their business increasingly efficiently,” Hardart said.

He added it’s also an issue of scale for Netflix. After all, the company would be the seventh largest country in the world if you were basing it off its 208 million subscribers. “The bigger you get, the harder it is to add those incremental gains,” he said about falling short of its Q1 subscriber goal.

Looking ahead, he expects the Disney and Netflix battle will come down to their performances abroad; the “low-hanging fruit” — aka subscribers in the U.S. — “have all been caught,” so now it comes down to markets like India, where Netflix is spending $1 billion on content, and South Korea, where Netflix has earmarked $500 million. “That new content will help attract subscribers in other parts of the world,” he said.

Brett Sifling, a financial advisor with Gerber Kawasaki Wealth & Investment Management, echoed Hardart. Netflix remains a “hold” for his firm, he said, and that it’s “not something we’re going to sell on this earnings report.”

Sifling said it’s fair to say Netflix was a victim of its own success in 2020, when it added a company-record 37 million new accounts. That “amazing year” was amplified by the pandemic, Sifling said, because “there’s obviously going to be a boost in engagement when you have people in a lockdown situation.”

Netflix said as much in its letter to shareholders on Tuesday, noting the pandemic “pulled forward” growth it expected to see in 2021. (Competition, the company said, didn’t play much of a role in its Q1 subscriber miss). Netflix co-CEO Reed Hastings expanded on that point in the company’s earnings call on Tuesday afternoon, saying the company had a decade where it was “growing smooth as silk,” and that right now growth is “just a little wobbly.” Still, he doesn’t believe that’s a sign of increased competition.

“And of course we were wondering, ‘Are we sure it’s not competition?’ Because obviously there’s a lot of new competition, and we really looked through all the data, looking at different regions where new competitors are launched or not launched. We just can’t see any difference in our relative growth in those regions,” Hastings said. “We’ve been competing with Amazon Prime for 13 years, with Hulu for 14 years. It’s always been very competitive with linear TV, too. There’s no real change that we can detect in the competitive environment.” 

Sifling agreed Netflix’s underwhelming Q1 subscriber growth is more tied to the “pulled forward” effect than anything its competitors have shown. “Disney+ is obviously doing extremely well,” he said, “but we’re in the camp that there’s room for each of these. It’s not one or the other; it’s both.”

And as far as newer competitors like Peacock and HBO Max potentially threatening Netflix’s dominance?

“Those companies aren’t even in the same league,” Sifling said.

Tim Baysinger