Netflix– Blood in the water.

Inflation undermines users’ willingness to pay.

• It looks like up to 25% of US subscribers to Netflix are considering leaving the service not to join a competitor but mostly because when times are tough, it’s the discretionary spend that gets cut first.
• This strongly implies that Netflix’s competitors are about to suffer just as much, if not more, with only Amazon and Apple being able to put up some resistance.
• Reviews.org conducted a survey of 1,000 US adults and found that 1 in 4 is planning on leaving the service within 12 months (see here) but this is clearly not as a result of competitive pressure.
• Within the 25%, the reasons for leaving are: rising cost of subscription 40%, inflation 20%, lack of content 22% and spending more time on the services of others 18%.
• The cost of Netflix has risen dramatically this year as its basic plan increased by 11% in January and its other plans by 20% to 25%.
• These were the first price increases for 3 years and so it is not surprising to see some churn, but if this survey is accurate, this would be way above what anyone is expecting.
• In my experience, there is a large gulf between what people say they are going to do in response to a survey and what they actually do and so I suspect that these figures are extreme.
• However, it is indicative of a trend and the impact is, as of yet, unclear but it looks like it could be worse than expected.
• This is not just bad for Netflix but for all of the streaming players as only 18% of the respondents said they were considering leaving due to a lack of content.
• This means that subsequent quarters may very well see HBO Max, Disney, Hulu, Peacock etc all suffer as their users tighten their belts in response to the current economic climate.
• The official US inflation rate is 8.3% YoY but the way that this is measured has been tinkered with over the years and bears little resemblance to how it was calculated in the 1970s and 1980s which was the last time we had a real inflation problem.
• If one uses the 1980s methodology (which in my opinion is arguably more accurate) one ends up with a figure closer to 12% or 13% (see here) meaning that things are already worse than they were last time around.
• This means that once consumers have paid for the necessities, there will be much less left over to spend on luxuries and streaming TV with no advertisements falls into that category.
• The same is true of smartphones which are a necessity but tend to get replaced before they break meaning that users can hold onto their phones for longer before they replace them.
• The net result of this is fewer device shipments which is what the market is already demonstrating.
• However, of the streaming companies, I suspect that both Apple and Amazon will be able to weather the storm better because they attach more than just content streaming to their subscription.
• In Amazon’s case, the vast majority of its Prime Video users primarily pay the subscription to get access to unlimited 2-day shipping which I suspect they are much less likely to cancel.
• In Apple’s case, Apple TV+ is often attached to hardware for a limited time and given its generally more affluent user base, it is less likely to suffer as its users are going to be less affected by inflation.
• Hence, those that are able to attach a non-streaming value proposition to their video subscription are likely to fare better than pure plays like Netflix.
• Netflix has bounced off the bottom a bit and while it is flirting on the edge of value territory, it looks like its fundamentals are deteriorating.
• This means that the share price could easily fall further, especially in this market.
• I am not tempted to bottom fish this one.