Second Covid wave will boost all streamers but Netflix may yet reign supreme

When Netflix reports its latest quarterly results this week, all eyes will be on whether the great coronavirus streaming boom has come to an end.

The world’s largest streaming service, which has an outside chance of breaking the 200 million subscriber mark in its third-quarter update on Tuesday, has been one of the big winners of the pandemic. Rolling lockdowns followed by ongoing social restrictions have kept millions at home seeking entertainment, which has fuelled a boom in the numbers clicking the subscribe button.

Netflix has added 26 million new sign-ups in the first half of this year, compared with 12 million in the same period last year and 27.8 million for the whole of 2019. Investors have rushed in, driving Netflix’s shares up 90% over the past year, giving the business a market value of $239bn, currently about $10bn more than Disney, the world’s biggest entertainment company.

But Netflix reckons the stratospheric rate of sign-ups is over, for now at least. The company’s share price took a hit in July after it forecast just 2.5 million new subscribers for the third quarter, with management arguing a slowdown was ahead because the pandemic had simply brought forward new subscribers it would have expected to join later this year. Yet many on Wall Street expect Netflix – a master of the underpromise, overdeliver forecast – to put on more than double its prediction as the second wave continues to restrict competing entertainment options such as going to the cinema.

“We expect Netflix to report third-quarter results well above guidance and consensus expectations,” said Goldman Sachs analyst Heath Terry in a note to investors.

Terry is forecasting about 6 million new Netflix subscribers. “[This is] driven by growth in content on the platform, a lack of competition for entertainment hours and spend, and more time being spent at home. Management is likely to continue to guide conservatively given its outperformance earlier in the year and the massive uncertainty of the current environment.”

However, a wider threat is the rise of competing streaming services, most notably Disney+, which has amassed about 60 million subscribers in less than a year.

Disney’s service is rolling out in more countries and, with cinemas shut or on limited hours and struggling for new films, the company has seized the opportunity to move big-screen blockbusters to its streaming service to drive subscriptions. Mulan was made available in August, for an additional fee of £19.99, with Pixar’s Soul set to follow at Christmas.

Analysts do not expect Disney, which last week reorganised its operations to prioritise streaming, to start going straight to streaming and digital release for all of its blockbusters when the cinema industry eventually recovers. This means Netflix remains the king of content, spending an estimated $17bn making and licensing TV shows and films this year and as much as $26bn by 2026, according to BMO Capital Markets.

“The competition is certainly heating up,” said Richard Broughton, analyst at Ampere. “But if I were Netflix I wouldn’t be too concerned by some of the moves Disney is making right now. Disney doesn’t have anywhere near the volume of content Netflix does, so it is unlikely to be eating significantly into the time subscribers are spending on its service.”

However, Broughton thinks the rise of well-funded rivals – from WarnerMedia’s HBO Max to NBCUniversal’s Peacock – as well as Amazon’s continuing effort to build Prime Video globally, will eventually put pressure on Netflix as consumers are forced to choose between streamers. “This time next year, there will be a significant number of strong services,” he said. “A time will come when consumers hit a crunch point, with their wallets being stretched by all these different services.”

As the battle for subscribers intensifies, analysts will be keenly observing the impact of Netflix’s move last week to drop its sign-up carrot of a free month’s trial in the US and UK – to stop super-bingers watching and then cancelling without paying a penny. It was replaced with a 50% discount for the first two months.

The pandemic subscriber rush may be over, but the fight for global streaming supremacy shows no sign of slowing down.

The Guardian

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