Focus on revenue, profit, not extra subscribers

Netflix There’s a message for investors: start focusing on revenue and profit, and stop obsessing about subscriber growth.

Netflix makes its argument with some clear comments in its quarterly shareholder letter. The world’s largest streaming company said it would stop forecasting paid subscriptions. The corporate rationale behind this change is to get investors to focus on revenue instead of customer growth.

“We are increasingly focusing on revenue as our primary leading metric,” Netflix wrote in reporting third-quarter earnings Tuesday. “This will become especially important in 2023 as we develop new revenue streams such as paid advertising and sharing, where membership is only one component of our revenue growth.” I.”

Netflix will continue to provide guidance on revenue, operating income, operating margin, and net income – traditional indicators of profitability – and will still report subscriber growth added every quarter. It will not predict what is to come.

Theoretically, Netflix’s advertising tier and upcoming crackdown on password sharing should restore subscriber growth. But Netflix, which gained 2.4 million subscribers in the third quarter on a “particularly strong” content medium, led by “Stranger Things 4,” can consider quarters with 10 million subscribers. sign up as a relic of the past.

Rather than operating in a world full of pandemic-era comparisons fueled by massive growth, Netflix is ​​trying to direct investors’ focus to the fact that the streaming service their really make money. Netflix addressed this directly in the “Competition” section of its shareholder letter.

“It’s hard to build a large and profitable streaming business – our best estimate is that all of these competitors are losing money streaming, with a total live operating loss annual revenue this year alone could exceed $10 billion, compared to our +$5 – $6 billion in annual operating profit,” Netflix wrote.

In other words: Netflix is ​​saying it’s built a great streaming business, while Disney, Discovery of Warner Bros., Comcastof NBCUniversal, Paramount Globaland others would like to build a great streaming business. Netflix admits some of its competitors can get there, through consolidation and price hikes.

This is a clear competitive advantage for Netflix, unlike subscribers added, where Disney – earlier in its growth cycle, launched Disney+ in 2019 – have the upper hand. Disney added 14.4 million Disney+ customers last quarter while Netflix lost 970,000.

Netflix stock rallied after hours, up 14%. The company is adding subscribers again after losing customers in the first and second quarters. Next quarter, Netflix says it will add 4.5 million customers.

But Netflix says we shouldn’t focus on that anymore. The question is whether investors will listen.

Disclosure: Comcast’s NBCUniversal is the parent company of CNBC.

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