Netflix tells investors it can take the heat from new competitors

Netflix plans to boost its spending by 20 per cent this year, bringing its programming budget to about US$12 billion (S$16.2 billion) on a profit-and-loss basis.
Netflix plans to boost its spending by 20 per cent this year, bringing its programming budget to about US$12 billion (S$16.2 billion) on a profit-and-loss basis.PHOTO: REUTERS

LOS ANGELES (BLOOMBERG) - Netflix is facing the toughest year in its history in terms of new streaming competition, but the company says it's ready.

With technology and media giants such as Apple, AT&T, Comcast and Walt Disney Co all bringing new video platforms online, Netflix is working to keep customers loyal with a flood of shows and movies. The company plans to boost its spending by 20 per cent this year, bringing its programming budget to about US$12 billion (S$16.2 billion) on a profit-and-loss basis.

"We view our big long-term opportunity as big and unchanged," chief executive officer Reed Hastings said during a pretaped recap of its fourth-quarter earnings, released on Tuesday (Jan 21).

Netflix climbed as much as 4.3 per cent in late trading after delivering generally upbeat results, with overseas growth helping offset a slowdown at home. Though the company expects to add fewer subscribers in the current quarter than Wall Street projected, it said there's "ample room for many services to grow."

Netflix investors have been grappling with whether the company's days of reliable growth are over. The company added fewer customers in 2019 than it did in 2018, and its increase in the US and Canada decelerated by more than 3 million. In posting the results Tuesday, Netflix said price hikes and a growing array of options have made it harder to attract customers.

It's only going to get tougher. Apple's TV+ and the Disney+ platform both launched in the US during November, enticing consumers with lower-cost services, while AT&T's HBO Max and Comcast's Peacock are both coming online in the next few months.

All those competitors are likely to slow customer additions and increase the number of existing customers who cancel Netflix.

Against that backdrop, Netflix posted its weakest year of domestic subscriber growth since it first broke out its online service from the company's traditional DVD-by-mail business in 2011. Netflix is projecting a gain of 7 million paid subscribers worldwide in the first quarter, short of the 7.82 million estimate.

"We are working hard to improve our service to combat these factors," it said in a letter to shareholders.

 
 
 
 

But Netflix argues that its strategy is still sound, and competition shouldn't cause it to change course. Losing popular shows such as "Friends" to its new rivals has had no impact on viewership so far. Netflix subscribers are just finding other shows to watch, Chief Content Officer Ted Sarandos said.

For proof, Netflix can point to its global growth in the latest quarter. The company added 8.76 million customers in the period, compared with forecasts of 7.65 million. Hastings described them as "amazing numbers."

Netflix has pinned its future potential on growth outside the US, where it doesn't yet face the same level of competition. Europe and Latin America have been the company's engine in the past couple years, and continued to serve that role in the fourth quarter. Netflix added 4.4 million customers in Europe, bringing its overall total to almost 52 million, and another 2.04 million customers in Latin America.

NON-ENGLISH SHOWS

Netflix plans to release more than 100 seasons of local language programming next year. Though its biggest global hits are mostly English-language shows such as "Stranger Things" and "The Witcher," its most popular programs in many territories are in other languages, like Spain's "Casa de Papel." The company is also experimenting with different pricing plans in Asia.

Netflix has borrowed billions to fund all that programming, and its long-term debt stands at almost US$15 billion. But the company said this past year will mark the high-water mark in terms of its cash burn. Earnings of US$1.30 a share also handily beat analyst estimates of 30 cents, lifted by a tax benefit.

Investors weren't sure what to make of Netflix's results at first. The shares had dropped as much as 3 per cent to US$327.97 in extended trading before rebounding. The company's shares climbed 4.5 per cent so far this year before the close.

"After several years of unchecked dominance in the US streaming-video industry, Netflix faces high-profile new streaming rivals," Geetha Ranganathan, a Bloomberg Intelligence analyst, said in a report. "Yet the breadth of its content and a compelling value proposition will make it hard for new entrants like Disney+ to unseat the company."