Netflix chairman and co-chief executive officer Reed Hastings had some screenplay-worthy words for this week’s news about Netflix’s plummeting popularity and prospects.
‘Well, it’s a b***h,’ Hastings said in a Wednesday town hall with employees, according to the Wall Street Journal.
His comments came a day after the streaming giant posted its first quarterly-subscriber drop in over a decade, and the same day investor Bill Ackman pulled $1.1 billion in funding – a debacle that cost Netflix $50 billion overnight.
To curb its bleeding finances, insiders at Netflix told the Wall Street Journal that the company is going to begin assigning production budgets based on shows’ viewership – shows that pull more viewers are shows that get more money.
‘We should right-size budgets depending on what the creative dictates, and what the size of the audience is,’ Netflix’s head of global TV, Bela Bajaria told the Wall Street Journal.
On Wednesday billionaire investor Bill Ackman liquidated a $1.1billion bet he had on crisis-hit Netflix – despite losing $400million.
The hedge fund manager ditched the 3.1million shares he bought just three months ago as the turmoil at the streaming giant continued to spiral.
He yesterday announced his New York-based Pershing Square Capital Management was parting with the investment due to the firm’s ‘unpredictable’ future.
Billionaire investor Bill Ackman (pictured) has liquidated a $1.1billion bet he had on crisis-hit Netflix – despite losing $400million
This graphic shows how Netflix benefitted from the Covid boom. Between January and March 2020, business continued as it had done in 2019 and 2018, before the number of new accounts rocketed from mid-March through to May as much of the world went into lockdown.
Ackman told CNBC’s Scott Wapner on Thursday morning that, ‘I’m 100 percent ready to admit when I’m wrong and 100 percent ready to admit when I’m wrong, quickly’
‘It’s a great company run by a great management team at a time when there’s a degree of uncertainty that doesn’t make it fit in the Pershing Square portfolio.’
Netflix lost $50billion overnight as its shares nosedived off a cliff amid a mass exodus of subscribers.
The streaming giant saw the huge losses after its stocks failed to regather over the course of yesterday from a record 35 per cent slump.
Pre-market trading this morning showed the company’s shares remaining low at $226 – spiraling down from $348 on Tuesday afternoon.
Meanwhile its rivals appeared to rally as they released figures showing millions more subscribers over the last few months.
HBO Max and HBO customers skyrocketed by three million in the last quarter to 76.8million – showing a 12.8million spike year on year.
Ackman appeared to be the first big name to jump ship as his firm liquidated the $1.1billion bet it had on Netflix.
Pershing Square Capital Management sold the 3.1million shares it had bought just three months ago as Netflix’ shares tumbled.
In January, he funneled over $1 billion into the streaming service just days after a disappointing forecast for subscriptions pushed the share price lower.
Now a second bout of negative news about subscribers – the company said it had lost 200,000 – prompted the fund manager to turn his back on a company.
Pictured: Netflix subscribers over the past few months are pictured along with the projected first quarter of 2022
Netflix paid subscriber growth, showing a steep drop-off from 2020 to the first two quarters of 2021
How Netflix became a pandemic darling with it’s original content before losing 200,000 subscribers and the confidence of investors
1997 – Marc Randolph and Reed Hastings start Netflix after discussing ways to emulate Amazon’s internet sales model
1999 – Randolph and Hastings decline to sell Netflix to Jeff Bezos after receiving a roughly $15million offer
2000 – Hastings and Randolph offer to sell Netflix to Blockbuster for $50million. Blockbuster CEO john Antioco declined saying ‘The dot-com hysteria is completely overblown
2002 – Netflix goes public, selling 5.5million shares at $15 per share
2005 – Raking in over $500million in revenue, Netflix is shipping 1 million DVDs daily from its selection of over 35,000 films
2007 – Netflix launches its streaming website, the same year it delivers its billionth DVD
2008 – All Netflix customers with a DVD rental subscription are give full access to the online streaming service, free of charge
2009 – Streams on the Netflix website surpass all DVD shipments
2010 – Netflix reaches a $1billion deal to stream Paramount Lionsgate and Metro-Goldwyn-Mayer films
2011 – The same year Netflix becomes the largest source of internet streaming in North America, it splits its existing subscription model, offering separate plans for DVD rentals and streaming
2012 – Netflix launches in select countries across Europe, and signs a streaming deal with Disney and The Weinstein Company
2013 – Netflix begins producing and releasing original series
2014 – Subscription fees are raised from $7.99 to $9.99
2017 – After four years of producing original content, Netflix announces plans to make half its library consist of original content by 2019 by investing $8billion in the project
March 2020 – Number of new accounts rockets through May as much of the world goes into lockdown due to the Covid pandemic
March 2022 – After the invasion of Ukraine Netflix announces it is halting all streaming services in Russia at the cost of 700,000 subscribers
April 2022 – Netflix’s announces it lost 200,000 subscribers in its first quarter. Hours later investor Bill Ackman pulls $1.1 billion in funding, costing Netflix $50 billion overnight
Ackman said proposed business model changes, including advertising and going after non-paying customers, made sense but would be unpredictable.
He said: ‘While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.’
Pershing Square, which now invests $21.5billion, buys shares in only about a dozen companies at a time and needs a ‘high degree of predictability’, Ackman said.
Rather than wait around for things to improve at Netflix, Ackman locked in losses calculated to be more than $400 million, people familiar with the portfolio said.
Netflix is losing billions of dollars a year because of illegal password-sharing ‘marketplaces’ that offer access for just $1, experts have claimed. The popular streaming app is missing out on up to $6.25billion annually as customers use the services to dodge the $19.99 a month premium account fee.
Why is Netflix losing viewers, and what will it do now?
What are Netflix’s issues?
The main issue for Netflix is simply that it lost viewers over the start of the year while its biggest rivals made gains.
Netflix revealed on Tuesday that it lost 200,000 users over the first three months of 2022, falling well short of predictions it would add 2.5 million subscribers.
In the UK, the pressure on streaming firms has become apparent as customers look to reduce their number of subscriptions as they witness soaring energy and goods bills during the cost-of-living crisis. Experts at Kantar said earlier this week that around 1.5 million subscriptions have been axed in the UK since the start of 2022.
Netflix said the challenging economic backdrop, war in Ukraine, slowing rollout of broadband in some countries and the large number of subscribers sharing their account details with non-paying households have all contributed to the decline. The company’s withdrawal from Russia following the invasion of Ukraine meant it immediately lost its 700,000 customers in the region, but the firm would have still seen figures significantly below expectations without the intervention.
As customer spending comes under pressure, the group faces increased demand for high quality content in order to justify people’s subscription fees. The firm’s key challenge in recent years has been to ensure a strong roster of original series and films as many previous partners, such as Disney, withdrew their content to start up their own platforms.
How bad could the subscriber exodus get?
The key reason shares dropped so sharply on Tuesday was because bosses warned shareholders that the situation was going to get worse before it got any better. Netflix predicted that another two million users will leave in the three months to July.
The company said its profits dropped 6% over the latest quarter and the downbeat outlook could suggest an even sharper profit decline could be on the cards. Freetrade’s Paul Allison said the predicted drop in users is ‘a worrying sign… at a time when the firm is raising prices across the board to generate enough cash flow (which is currently negative) to maintain an entertaining line-up of shows’.
The streaming firm will hope that its recent heavy investment in fresh content and franchises will quickly bring rewards. Last year, the company announced multimillion-pound deals to buy the works of Roald Dahl and the rights to the upcoming Knives Out sequels. It will also hope that the return of top performing series – such as Stranger Things next month – will halt customers thinking about axing their subscriptions.
What could they do next?
Bosses at the company said on Tuesday that they are considering a number of significant changes which could improve customer numbers and profitability.
They said they are now open to adding advertising to the service, in return for a cheaper subscription. Reed Hastings, co-founder and chairman of Netflix, has long been opposed to introducing commercials to the service but could make the move to add another revenue stream.
The company could also clamp down on customers sharing their accounts with other households. Netflix started a crackdown in Chile, Costa Rica and Peru on people sharing passwords and is considering expanding the scheme.
The company said in its latest financial report that it believes it is being shared with 100 million extra households alongside the 222 million paying for the service.
When Netflix first U-turned from DVD-rental to home streaming the company had very few competitors, but has seen a flurry of competition grow in recent years. People have signed up to numerous subscriptions in recent years but are now starting to reduce the number they pay for as they tighten their belts due to the cost-of-living crisis, creating more competition.
Disney+ has been a particular winner over the past year, with the firm attracting more customers than initially expected as families signed up during the pandemic. Netflix also continues to face competition from Amazon, which acquired James Bond studio MGM last month in an 8.5 billion dollar (£6.5 billion) deal to build a library of content for subscribers.
However, one of the group’s biggest competitors is also the desire from customers to spend any time away from screens. Reed Hastings infamously said that Netflix saw the human need to sleep as a bigger competitor than Amazon and HBO as it takes up a ‘very large pool of time’, saying it benefits from viewers staying up late because they get addicted to a series.
After the sale, Pershing Square’s portfolios are off roughly two per cent for the year, Ackman said.
Netflix said it had lost 200,000 subscribers in its first quarter, falling well short of its modest predictions that it would add 2.5million subscribers.
Its decision in early March to suspend service in Russia after it invaded Ukraine resulted in the loss of 700,000 members.
Profitable hedges helped Pershing Square survive the early days of the pandemic in 2020 and then again in recent months as interest rates began to rise.
The last three years have been among the best in the hedge fund’s lifetime, including a 70.2 per cent gain in 2020.
But Ackman also acknowledged he had learned from leaner times when his fund backed Valeant Pharmaceuticals, a bet that cost the hedge fund billions in losses.
He said in a statement: ‘Today, we sold our investment in Netflix, which we purchased earlier this year.
‘The loss on our investment reduced the Pershing Square Funds’ year-to-date returns by four percentage points.
‘Reflecting this loss, as of today’s close, the Pershing Square Funds are down approximately two percent year-to-date.
‘While we have a high regard for Netflix’s management and the remarkable company they have built, in light of the enormous operating leverage inherent in the company’s business model, changes in the company’s future subscriber growth can have an outsized impact on our estimate of intrinsic value.
‘In our original analysis, we viewed this operating leverage favorably due to our long-term growth expectations for the company.
‘Yesterday, in response to continued disappointing customer subscriber growth, Netflix announced that it would modify its subscription-only model to be more aggressive in going after non-paying customers, and to incorporate advertising, an approach that management estimates would take ‘one to two years’ to implement.
‘While we believe these business model changes are sensible, it is extremely difficult to predict their impact on the company’s long-term subscriber growth, future revenues, operating margins, and capital intensity.
‘We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio.
‘While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.
‘Based on management’s track record, we would not be surprised to see Netflix continue to be a highly successful company and an excellent investment from its current market value.
‘That said, we believe the dispersion of outcomes has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding.
‘One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis.
‘That is why we did so here. We are in the midst of an opportunity rich environment for Pershing Square due to the dramatic shift in Federal Reserve policy, the highly inflationary environment, geopolitical uncertainty, and the resulting high degree of security price volatility.
‘We therefore expect to find a good use for the Netflix proceeds. Please feel free to contact the investor relations team if you have any questions about the above. We are grateful for your support and long-term partnership.’
Netflix shares closed at $122.42 last night after shedding more than a third of their value in the company’s biggest one-day drop on a percentage basis since 2004.
Its stock was the worst performing on the S&P 500 for the day and sparked the firm’s largest one-day drop in market capitalization in its history.
The shares have now lost 62 per cent of their value since the beginning of the year, amid fears the streaming wars will prove to be an unwinnable money pit.
Despite Netflix’s woes, its rivals appeared to be gathering momentum, with HBO Max and HBO reporting it had added three million subscribers in the last quarter.
AT&T said the channels had rocketed to 76.8million global customers as of March, marking a 12.8million spike on the previous year’s figure.
It also proved popular in the US, with it adding 4.4million subscribers since last year to 48.6m. CEO John Stankey said: ‘AT&T has entered a new era.’
This morning the telecommunications giant posted a 2.5 per cent rise in revenue for its core phone and internet business in the first quarter, as the telecom giant benefited from the expansion of its fiber internet and 5G services.
The Dallas-based firm – whose WarnerMedia unit which includes HBO and CNN completed its merger with Discovery Inc earlier this month to form the new media firm Warner Bros. Discovery – added 691,000 monthly phone subscribers during the quarter.
AT&T is returning to its roots of providing wireless services after unwinding a years-long effort to become a media and entertainment company.
Shares of AT&T rose 1.5 per cent to $19.73 in premarket trading.
The company’s revenue for the standalone AT&T excluding WarnerMedia rose to $29.7billion in the first quarter from $29billion a year earlier.
But total revenue was down more than 13 per cent, reflecting the impact of its divested satellite TV business and weakness in its business wireline unit.
The company added 289,000 fiber internet customers during the quarter ended March 31.
Total global subscribers for premium TV channel HBO and streaming service HBO Max, which are part of WarnerMedia, rose by three million from the previous quarter.
Net income attributable to common stock fell to $4.8billion, or 65 cents per share, from $7.5billion, or $1.02 per share a year earlier.