Netflix had warned this was going to happen. In the first half of 2020, as Covid-19 caused national lockdowns to be imposed on country after country, the streaming video service was unsurprisingly reaping the benefits.
In the six months to the end of June, almost as many subscribers had signed up to the site as had in the whole of 2019 — a total of 26 million people. The company was touted as one of the most promising “stay-at-home” stocks.
But, by July, things were starting to change. Netflix was already seeing signs that growth was slowing as consumers got through the initial shock of Covid and social restrictions.
Last night, the extent of that was laid bare in the company’s third quarter results.
Netflix said it had added just 2.2 million new subscribers in the three months to the end of September, below even the company’s own conservative estimates and significantly lower than the 16 million it added in the first quarter and 10 million in the second.
This was, Netflix admitted, its weakest growth in more than four years. Back then, the company had not even been operating in many regions.
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All this should, perhaps, come as no surprise. Spencer Neumann, Netflix’s chief financial officer, said the company “expected and knew there would be some level of slowdown”. There had been a “pull forward” effect, with those who would sign up for the streaming site choosing to do so earlier in the year, when lockdowns were first imposed.
“Infinite growth can’t go on forever,” Forrester Research analyst Jim Nail said.
This pull forward effect is expected to weigh on Netflix’s results for some time. As “the world hopefully recovers in 2021”, it said, subscriber additions for the first half of 2021 were “likely to be down” on 2020 figures.
All of which begs the question, is the Covid bounce over for Netflix? Investors, certainly, seem spooked, with shares in the company slipping as much as 7.4pc in after-hours trading last night.
What’s more, Sophie Lund-Yates, analyst at Hargreaves Lansdown, has previously argued that “if you haven’t subscribed to Netflix during lockdown, the chances are you never will”.
But it may be too soon to say a boost from lockdown has faded for Netflix. This is a company that now has a significant pool of subscribers. In fact, even with the lower third quarter figures, Netflix has still managed to attract more subscribers than it had been expecting at the start of 2020, viewers flocking to hit shows such as Selling Sunset and Emily in Paris.
All those subscribers that Netflix has accumulated are paying monthly fees, leading to what has been termed by analysts as a “virtuous cycle”, in that the recent surge in subscriber numbers means more cash for Netflix to spend on productions, which in turn attracts further subscribers.
There are pools of potential subscribers Netflix can tap. In the Asia Pacific region specifically, a market which is less saturated, levels of subscriber growth for Netflix remained robust in the third quarter.
Covid-19 has also caused further ripples, though. Since the start of the year, structural changes have taken place in how people consume content. Cinemas have been shuttered across the US and UK, and, instead, Lund-Yates says, “people are continuing to look for smash content from the comfort of their sofas”.
“Whichever way you cut it, the pull of box office hits is much less potent these days.”
What this will mean in the long-term remains to be seen. Whether, once there is some Covid-19 vaccine approved, millions will flock back into cinemas appears still up for debate — although recent successful premieres of films over streaming services suggests some change to the status quo.
Netflix, for its part, is ramping up spend to meet demand for content in the meantime, and, since the peak of lockdown, has completed principle photography on more than 50 productions.
An initial boost from Covid-19 may be over for Netflix. It may have added fewer subscribers than even executives were expecting in the third quarter. But, the company remains in the strongest position it has ever been. Quite clearly, the curtain isn’t yet coming down for it just yet.
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