While our rush to replenish our diet of social interaction will see eateries, pubs and clubs make an instant resurgence once restrictions are lifted, the Covid-19 pandemic has produced extremes in terms of commercial winners and losers. Perhaps the travel and tourism industries are in the unenviable position of biggest losers, streaming services are definitely the big winners as isolation draws our attention to escape through entertainment. It’s no surprise Netflix is a big winner in this category.
Earlier this year I commented on the Netflix Earnings for Q4 2019 and their projections for the 2020 year, taking a contrarian position to the analysts at the time who were expecting Netflix to struggle to get the seven million new subscribers forecast for Q1. The analyst’s doubts were largely fueled by the competitive effect of Disney’s global expansion which began early this year, but I took the position that the global market penetration Netflix had already established was not an advantage easily surpassed or assailed. Positioning 101.
As it turns out, the global pandemic has provided Netflix its strongest ever quarter for new subscribers adding 15.77 million paid subscribers globally in Q1 taking their total global subscriber numbers to 182.86 million. That’s a nice result that translates to US$709 million in first quarter earnings versus US$344 million for the same period 2019.
For those concerned about the billions of dollars Netflix is investing in content creation, knowing their revenue grew 26% to US$5.77 billion from US$4.52 billion in the same period a year ago, should give some comfort. Certainly that result seems to have inspired investors with their shares closing at a record high of US$437.49 on Monday, consequently valuing the company at more than US$191 billion. In fact Netflix shares are up 34% in the year to date while Wall Street is down 15% after a 3% slump on Tuesday.
At the same time, the hours in lock-down with kids has also helped Disney+ gain a foothold of close to 30 million subscribers, but although Covid-19 has offered an unexpected boost to both streaming services, particularly the more established streamer Netflix, the latter is not focused on competitor activity (unlike the analysts).
Disney is calling back its titles from Netflix, which could be viewed as a competitive advantage, but while it can be argued that some Disney titles are timeless, Netflix viewers have already seen them if they wanted to, so it’s homes with new humans that might find the Disney catalogue of most appeal.
Netflix are firmly fixated on creating their own library of quality content, satisfaction in user experience and the marketing features afforded by technology and their connection to the subscriber. It’s their momentum, focus on the core value proposition to customers (which is multi-dimensional and omni-channel solved) that is their greatest competitive advantage.
Their content is established as quality creative with high production value, increasingly original and locally flavoured. Their UX is geared to personal preference through intuitive technology that gets more effective as viewing hours, by individuals and market sector, amass. Their established revenue streams, considerably now boosted by the viewing public’s circumstances created by the Covid pandemic, provide the power to attract and secure the best resources, consolidate growth and indulge experimentation with innovation that might further enhance UX and content.
In summary the Covid-19 pandemic has been a gross inconvenience, a devastating disease for some families and certainly many businesses, but it has been a happy accident for the content streamers well prepared to sate the appetite for new entertainment that isolation breeds.
From an investment perspective, Netflix might be a difficult share to purchase at US$437, but better buying might be found in the businesses who service Netflix in their content production and technology?
If you would like to know more about the broader effects of Covid-19 on commercial enterprise, contact Wanted – Reward Offered.