The company closes on becoming free cash flow positive as it faces up to competition
Thursday 21 Jan 2021 Author: Tom Sieber

The short-term picture for Netflix is looking encouraging after it beat expectations with its fourth quarter subscriber numbers and signalled an end to its reliance on heavy borrowing. However, question marks remain over its longer-term prospects in a highly competitive streaming space.

The company passed the 200 million subscriber milestone as it added a better-than-forecast 8.5 million new paid subscriptions. Previously, third quarter subscriber numbers had disappointed, with the company suffering a lull after securing tens of millions of new users as the pandemic hit.

Like other streaming services, Netflix has been a beneficiary of people being stuck at home while cinemas and other entertainment venues have been closed.

This highlights a challenge for Netflix and its peer group, which is how to profit not just from adding subscriptions but also from viewers making more use of the platform.

Despite this challenge, management remain committed to the current model, rather than looking at areas such as premium content for which you pay extra. They also outlined their belief they can continue to grow the subscriber base despite already being 60% penetrated in North America.

Notably the fourth quarter announcement included guidance that the company will soon become free cash flow positive and Netflix even tentatively outlined plans to buy back shares. The former factor would reduce its reliance on external debt financing to sustain its heavy investment in new productions.

Helpfully many recently released productions appear to have hit the mark with viewers – notably the likes of The Crown, Bridgerton and The Queen’s Gambit.

However, rivals are also stepping up their spend on new content, in particular Disney which also has decades worth of its own creations to fall back on.

Independent media analyst Ian Whittaker commented: ‘While it stated it would be aggressive seeking out growth opportunities Netflix is essentially an operationally geared model (fixed cost of programming and the more subscribers you get, the higher the margins) and there is a natural limit on this.

‘It’s clear that Netflix does not intend to sit back and its comments about matching Disney at some point in family animation shows a willingness to take the fight to the enemy.

‘The key question is whether consumers keep multiple streaming services at a time when they are facing increasing economic pressure and strains on the household budget.’ [TS]

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