NEW YORK (Reuters Breakingviews) - Netflix’s growth stumble is a small gift to rivals. The streaming-video service attracted fewer subscribers than forecast in the second quarter, knocking more than $20 billion off its value. That will comfort Walt Disney and Comcast as they wage a costly battle for parts of Twenty-First Century Fox and Sky. Yet even a more sluggish Netflix remains far ahead in the race.
The company led by Reed Hastings added 5.2 million net new customers globally in the latest period. That represents an annualized growth rate of nearly 18 percent. And the company grew its typically meager earnings by nearly six times, to $384 million.
Yet Netflix is judged on its subscriber growth rather than profit, and a company with its sky-high valuation – its shares had more than doubled since the start of the year – could ill afford to miss its forecast by 1 million customers. Investors pushed the shares 14 percent lower in the first hour following the release of results after the closing market bell on Monday.
Still it’s a leader of streaming services with a global audience reach of nearly 125 million paying subscribers, which is why even after Monday’s rout the company’s value was up some 80 percent since the end of last year to about $150 billion. But the plunge also underscores that Netflix’s spending – some $8 billion on TV shows and movies and a cash burn of up to $4 billion this year – to get more viewers is a risky trade-off.
That budget does bring a form of soft power in Hollywood. Last week Netflix beat out HBO in Emmy nominations thanks to shows like “Stranger Things” and “GLOW,” breaking the pay-TV network’s 17-year streak in the No. 1 spot. HBO’s “Game of Thrones” is still top dog in recognition but that show is nearing its end and new parent AT&T may not have the stomach or the ability to match Netflix’s devil-may-care attitude.
Other rivals are focusing their spending on mergers that could prove to be even greater risks given the ever-increasing offers on hand. Disney has bumped its bid for parts of Fox by some 36 percent above its original agreement, to $71.3 billion. Comcast last week one-upped the Mickey Mouse owner with a $34 billion bid for European satellite firm Sky, and may yet try to spoil it again with an even higher offer for Fox.
The reason for the madness? Traditional media is caught on the back foot after initially playing down Netflix’s potential and licensing content to it for short-term revenue. Despite its recent setback, Netflix has a 10-year head start. A couple of weight-inducing acquisitions will not make rivals more fleet of foot.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.