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Netflix: Subs up, Hastings steps down

January 20, 2023

By Colin Mann

Reed Hastings has become Executive Chairman of Netflix, with Greg Peters stepping up from COO to become Ted Sarandos’s co-CEO, and a member of the Netflix board. The news came as the streaming giant revealed Q4 2022 numbers that exceeded its forecast.

“I want to thank Reed for his visionary leadership, mentorship and friendship over the last 20 years,” said Sarandos. “We’ve all learned so much from his intellectual rigor, honesty and willingness to take big bets –and we look forward to working with him for many more years to come. Since Reed started to delegate management to us, Greg and I have built a strong operating model based on our shared values and like-minded approach to growth. I am so excited to start this new chapter with Greg as co-CEO.”

“I feel humbled and privileged to become co-CEO of Netflix,” added Peters. “Ted and I have worked together for many years – building tremendous trust and respect for each other. We’re also motivated by the same goal: a desire to better serve our members so that we can continue to grow our business.”

In addition to these changes, Bela Bajaria, formerly Head of Global TV, has become Chief Content Officer and Scott Stuber has become Chairman of Netflix Film. “Bela and Scott are outstanding creative executives with proven track records at Netflix,” declared Hastings.

Netflix finished 2022 with 231 million paid memberships and generated $32 billion (€29.5bn) of revenue, $5.6 billion in operating income, $2 billion of net cash from operating activities and $1.6 billion of free cash flow (FCF).

“2022 was a tough year, with a bumpy start but a brighter finish,” said Netflix in its Letter to Shareholders. “We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering. As always, our north stars remain pleasing our members and building even greater profitability over time.”

In November 2022, Netflix launched its new, lower priced ad-supported plan in 12 countries. “We believe branded television advertising is a substantial long term incremental revenue and profit opportunity for Netflix, and our ability to stand up this business in six months underscores our commitment both to give members more choice and to reaccelerate our growth,” it said.

“While it’s still early days for ads and we have lots to do (in particular better targeting and measurement), we are pleased with our progress to date across every dimension: member experience, value to advertisers, and incremental contribution to our business. Engagement, which is consistent with members on comparable ad-free plans, is better than what we had expected and we believe the lower price point is driving incremental membership growth. Also, as expected, we’ve seen very little switching from other plans. Overall the reaction to this launch from both consumers and advertisers has confirmed our belief that our ad-supported plan has strong unit economics (at minimum, in-line with or better than the comparable ad-free plan) and will generate incremental revenue and profit, though the impact on 2023 will be modest given that this will build slowly over time.”

Later in Q1, Netflix expects to start rolling out paid sharing more broadly. “Today’s widespread account sharing (100 million+ households) undermines our long term ability to invest in and improve Netflix, as well as build our business,” it asserted. “While our terms of use limit use of Netflix to a household, we recognize this is a change for members who share their account more broadly. So we’ve worked hard to build additional new features that improve the Netflix experience, including the ability for members to review which devices are using their account and to transfer a profile to a new account. As we roll out paid sharing, members in many countries will also have the option to pay extra if they want to share Netflix with people they don’t live with. As is the case today, all members will be able to watch while traveling, whether on a TV or mobile device.”

“This strong finish ends a topsy-turvy year for Netflix,” notes Paolo Pescatore, TMT Analyst at PP Foresight. “With all the focus on the new ad tier, people’s appetite to sign up to a subscription shows a willingness to pay. This is impressive as the ad tier represents a much longer term user and revenue opportunity.”

“While Hastings stepping down seems like a shock, timing is key. He has been at the helm for some time and every company needs to change, move with the times. He will still be closely affiliated with the company. From a leadership perspective, he has played an influential role in making Netflix a success and driving force in streaming. The company must not lose its focus on driving innovation and disruptive,” he suggests.

“Unquestionably, new shows ensure that Netflix ends the year in a far stronger position, building on blockbuster third quarter with normal service restored. This is in stark contrast to the first half of the year. Creating the next biggest blockbuster drives subscribers. Significantly, this excludes the move into advertising which will help broaden its base, business model and much more,” he suggests, adding that revenue growth will come from price rises and moving quickly into new areas.

“Expect to see a roller-coaster of year due to seasonality and uncertainty with consumer behaviour. Fundamentally, greater focus must be placed on driving revenue through new features and services,” he concludes.

“Netflix blew its Q4 subscriber targets out of the water,” says Jamie Lumley, Analyst for the TMT at global primary research firm Third Bridge. “However, we’ve heard from our experts that Netflix’s target was low to begin with considering in the same period last year, the company was able to add over 8 million new subscribers. What will be interesting to see is how the company fares with its target for its ad-supported tier; if it is to achieve 40 million subscribers by the third quarter of 2023, it will need to build some serious momentum in the coming months.”

“Reed Hastings stepping down from his current role raises a lot of questions about Netflix’s future strategy. While the subscriber growth numbers are encouraging, revenue growth is sluggish with the backdrop of a potential recession looming on everyone’s mind. Incoming Co-CEO Greg Peters will have a number of major decisions on his plate from managing high levels of expenses, password sharing, and cracking the code to find the next Stranger Things.”

“With the leadership switch-up, it will be important to see how this changes Netflix’s approach to broadening its offerings. Our experts have said that Netflix has been cautious in building out gaming, but there may be a transformational move in store if headwinds remain for streaming in 2023.”

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