Understanding Netflix's Shift: Exploring the Evolution of the Streaming Giant

Netflix, the top player in streaming, will reveal its first-quarter results on Thursday after being a favorite on Wall Street for months.

Analysts point out that a big part of Netflix's growth and success in the past has been due to its traditional business model. However, in recent months, the company has been making efforts to expand and even completely change that model.

Netflix has been making strategic moves to stay ahead of its streaming competitors like Disney+, Hulu, Max, and Peacock. While these platforms focus on original programming to attract subscribers, Netflix has been diversifying its offerings by investing in live sports, video games, and licensing content from other providers. Additionally, Netflix has transitioned from being an advertising-free subscription service to a full-blown ad-supported juggernaut.

Last year, Netflix took a risky step by encouraging users who share passwords to create their own accounts. This decision proved to be successful as the company announced in January that it had a record number of subscribers. As a result, Netflix's stock has seen a significant increase of 31% this year, outperforming its competitors.

Netflix's lead in the streaming wars is solid, but it may not see the same spike in new subscribers as before. According to senior analyst Ross Benes from eMarketer, the boost from cracking down on password-sharing is probably wearing off.

Instead, Thursday’s earnings may shed light on whether Netflix’s reinvention will be successful.

Netflix’s reinvention

Netflix was disappointed by last month's Oscars. Despite having the most nominations, they only won one award for best live-action short film. Moving forward, the company is shifting away from focusing on big-budget films and TV shows that win awards.

In recent months, Netflix has shown interest in licensing more content from other studios. Iconic shows from the 90s and early 2000s, such as "Seinfeld" and "Sex and the City," are gaining popularity with new generations as they become available on Netflix's platform.

Alicia Reese, an equity analyst at Wedbush Securities, mentioned that Netflix is attracting a large audience with both their original and licensed content. She noted that this strategy is not only effective but also cost-efficient for the company.

In addition to their regular offerings, Netflix has ventured into live and sports programming this year, stepping into the territory traditionally dominated by TV networks. In February, they broadcasted their first awards show, the Screen Actors' Guild Awards, and secured a 10-year agreement to air "WWE Raw" live, which is estimated to be worth over $5 billion.

In January, Netflix revealed that it had secured the exclusive rights to broadcast "WWE Raw" live, which is currently aired on Comcast's USA cable network. The 10-year agreement is reported to be worth over $5 billion.

Netflix has teamed up with Rockstar Games’ “Grand Theft Auto,” a highly popular action-adventure video game franchise, in a creative move to expand its presence in the video game industry.

Netflix co-CEO Greg Peters expressed his excitement about the success of GTA in January, stating that it was a top mobile game download for several weeks. This not only had a significant impact on Netflix but also showcased the popularity of mobile gaming overall.

Reese is confident in Netflix's new direction.

“Netflix has that winning formula right now,” she said. “They have a lot of content of various types that keep people using the service at various price points.”

TV with ads, again

Reese said she believes Netflix also has other avenues of growth including the company’s newer advertising-supported subscription tier.

Since the start of this year, Netflix has released several shows that have generated excitement among fans, including the live-action “Avatar: The Last Airbender."

Since the start of this year, Netflix has released several shows that have generated excitement among fans, including the live-action “Avatar: The Last Airbender."

Robert Falconer/Netflix

The ad tier, priced at $6.99 per month in the United States, has experienced rapid growth since its launch in late 2022, according to Netflix. In January, Amy Reinhard, Netflix's advertising president, revealed that the ad-tier had surpassed 23 million users.

According to Reese, Netflix's future growth may depend on how well it performs in the advertising sector.

Reese is eager to see more information about the advertising tier in the upcoming earnings report on Thursday.

Back in January, Peters mentioned that the company's goal was to attract more advertising revenue from traditional TV competitors.

“We know ad dollars follow engagement. We’ve got the most engaged audience so we believe we’re well positioned to capture some of that ad spend that shifts from linear to streaming,” he said.

Editor's P/S:

Netflix's strategic moves to reinvent its business model are a testament to the company's adaptability and determination to stay ahead in the competitive streaming landscape. By diversifying its offerings and exploring new revenue streams, Netflix is positioning itself for continued growth while meeting the evolving tastes of its subscribers. The success of its ad-supported tier and the expansion into live sports and video games are particularly notable, as they demonstrate Netflix's willingness to embrace new technologies and cater to a broader audience.

However, the potential impact of the crackdown on password sharing and the shift away from award-winning content raise questions about Netflix's future subscriber growth. The company's ability to maintain its momentum and attract new users will depend on the success of its reinvention efforts and its ability to differentiate itself from its competitors. The upcoming earnings report will provide valuable insights into the progress of Netflix's transformation and its prospects for continued success in the streaming wars.