Netflix braces for critical earnings call after challenging year

Netflix will share its earnings information and outlook going forward on Tuesday after a rocky year in which it faced falling subscription rates and increasing competition.

Tuesday’s call will be the streaming service giant’s first briefing on its quarterly earnings since sharing in April that the company lost 200,000 subscribers — its first subscriber loss in more than 10 years.

Netflix is now looking to incorporate advertising models into the platform after years of holding off on the ad-based plans offered by competitors. But the company is balancing a delicate scale by offering the model that may appease investors while trying not to disturb consumers accustomed to the ad-free streaming. 

Analysts will be watching closely to see if Netflix can carry out the trapeze act — or if it will fall.

“If Netflix can thread the needle of adding revenue via an ad-supported tier without cannibalizing its high value subscribers in Western markets, it could be positive for the market value,” said Neil Macker, senior equity analyst at Morningstar. 

Netflix last week partnered with Microsoft for advertising and technology as it moves forward with offering lower-priced, ad-supported subscription plans. The company told employees in a note the ads may come by the end of the year, The New York Times reported in May.

Offering a lower-priced plan that includes advertising may be more critical to limiting a loss of subscribers, rather than attracting new customers, said Wedbush analyst Michael Pachter. 

“I don’t think consumers would embrace ads if it was mandated. So if they just said, ‘Sorry, we’re going to have an hour of ads, period, everyone’s got to suffer through it.’ But if they make it optional, that ‘Hey, you will never see an ad on Netflix if you pay full price, and you have the option of signing up for less than full price and getting ads,’ no one’s going to complain about that. That’s your choice,” Pachter said. 

Analysts are expecting Netflix to report even steeper subscription losses in the three months since the bleak April report.

The company warned shareholders in April that it expects a drop in subscriptions to continue and forecasted a global paid subscriber loss of 2 million for the second quarter. 

“I think what we’re looking for is subscriber growth and explaining to us how they intend to limit churn and why that’s a good thing,” Pachter said. 

In addition to the forthcoming ad-supported model, Netflix is also cracking down on password sharing.

In the April letter to shareholders, the company outlined monetizing account sharing as a primary focus. The company started testing features, first in Latin America, for current members to have the choice to pay for additional households on their plan. 

Traditional media companies diving into streaming more aggressively are a big challenge for Netflix.

Disney+ and HBO Max are closing a subscriber gap with Netflix, although the company remains the market leader, Macker said in a Morningstar report. 

Macker said that traditional media firms have an advantage in that they can leverage existing customer relationships and existing content libraries with franchises to generate new programming. 

Disney+ has a host of exclusive shows tied to the Marvel and Star Wars franchises owned under the Disney umbrella. Disney even pulled in Marvel-tied shows that were released on Netflix before Disney+ launched, such as “Daredevil,” “Jessica Jones” and “Luke Cage.”

Macker predicted the recently closed merger between WarnerMedia, which owns HBO Max, and Discovery will also create a “viable global challenger” not only to Netflix, but also to Disney. 

Pachter said there is room for the competitors within the streaming market, however.

“Is McDonald’s as good as Denny’s or Applebee’s? And the answer is no. Are Denny’s and Applebee’s as good as Ruth’s Chris or Morton’s Steakhouse? And the answer is no. So they’re all in their own niche,” he said. 

“I’ve never heard anybody say, ‘Oh my god a steakhouse just opened on the block, McDonald’s is going out of business.’ Nobody would ever say that. And yet, ‘Oh, HBO is going to streaming. Oh, Netflix is going to zero.’ No, people consume both. They’re just different,” he added. 

In 2011, Pachter said he predicted that if streaming was successful, owners of content would pull shows from Netflix to use for their own services. While that narrative has played out, Pachter said he was wrong on the timing. 

It took longer for traditional companies to set up their own streaming services, giving Netflix time to create its own library with some original content. Netflix has had some programming misses, but it also has the widely popular “Stranger Things” series that released a two-part penultimate season this summer. 

Netflix’s most expensive film yet will be released on the platform Friday, following a limited theatrical release last week. The platform paid $200 million for Anthony and Joe Russo’s “The Gray Man,” The New York Times reported.

The spy film starring Chris Evans and Ran Gosling could lead to a larger franchise of content from the Russos, the brothers behind two of the biggest Marvel films in “Avengers: Infinity War” and “Avengers: Endgame.”

Pachter said Netflix has to adjust its expectations and find its spot in a more crowded environment that also includes Apple TV, Amazon, Peacock and Paramount plus.

“They have to give up on being the hyper growth company that is going to dominate the world and say, ‘Nope, there’s a place for us,’” he said. 

“We think it’s zero sum and it’s not, there’s room for three or four guys. They just have to frame it that way,” he added.