Netflix Needs To Find Another ‘Stranger Things’ To Fuel Growth And Keep The Wall Street Hounds At Bay

Netflix delivered its quarterly report card on Wednesday, and the scores on earnings, subscriber growth, viewing of new originals, etc., were generally good. The execs looked happy and relaxed on the earnings interview, and investors sent shares up 9% in after-hours trading. (And up 3.5% on the NASDAQ today, as of publish time.) And yet…..

The company hit 158 million worldwide subscribers and says it expects to hit 166 million by the end of the year, but Wall Street expects a lot more in the years to come. Morgan Stanley media analyst Benjamin Swinburne projects Netflix will reach 300 million subscribers — nearly double its current total — in 2025.

Netflix highlighted three uncertainties both in its quarterly letter to shareholders and in the earnings interview: a fall quarter with no returning hits, subscriber churn, and two new competitors launching in November.

“We’ve never had a quarter with so many big films launching,” Netflix CFO Spence Neumann said. “Combine that with some of the elevated churn that we saw in Q3 and the potential for that to continue into Q4. Lastly, there are obviously a few new competitors launching in the near term.”

Those three factors — new titles, churn and competition — are worth unpacking because they’ll play major roles in determining whether Netflix will continue to be the dominant streamer or fall somewhere in the middle of new pack that will include YouTube, Hulu, Prime Video, Apple TV+, Disney+, HBO Max and Peacock.

Netflix Needs New Franchise Hits (Like Stranger Things)

Netflix reported that 64 million households, which is more than one-third of all Netflix households, watched Stranger Things during the third quarter, but Netflix doesn’t have a returning show of that caliber during the fourth quarter. Meanwhile, Apple TV+’s The Morning Show (Jennifer Aniston and Reese Witherspoon) and Disney+’s Star Wars spin-off The Mandalorian are both premiering in the next month and are already generating gobs of media attention.

What Netflix does have is Martin Scorsese’s The Irishman and Noah Baumbach’s Marriage Story, which are both likely Academy Awards nominees for Best Picture. There’s also The Two Popes (Anthony Hopkins and Jonathan Pryce), Dolemite Is My Name (Eddie Murphy), 6 Underground (Ryan Reynolds) and The Laundromat (Meryl Streep).

“Movies are very valuable,” Netflix CEO Reed Hastings said. “People are used to paying for that, and the slate we have for this quarter and for next year is way better than any movie slate we’ve ever had.”

Netflix has started signaling that it can make and market hit original shows and movies by reporting the number households that watch at least 70 percent of a TV season or a film title during the first 28 days after the premiere date. In its letter to shareholders, Netflix highlighted the third seasons of Stranger Things (64 million) and Money Heist (44 million) plus original films Tall Girl (41 million), Secret Obsession (40 million), Otherhood (29 million) and limited series Unbelievable (32 million).

With a big list of catalog titles departing for other streamers over the next few years, Netflix will need even more of its own hits just to keep pace with the new services and with Hulu and Amazon that are all bulking up on their own big, expensive originals.

Do You Want Netflix ‘Every’ Month?

Netflix said Wednesday that it experienced elevated “churn,” or cancellations, by U.S. subscribers during the quarter related to a price increase. Netflix reported 500,000 net new subscribers — new subscribers minus cancellations — during the quarter but didn’t specify how much higher the cancellations were than usual.

Higher churn is normal following a price increases since a small number of price-sensitive subscribers will decide that $11 a month for Netflix is OK but $13 a month is a deal-breaker. The vast majority of U.S. subscribers went along with the increase, which explains why Netflix’s average revenue per subscriber increased 16.5% from the same quarter the year before.

A big unknown is whether cheaper pricing by Disney+ ($7 a month) and Apple TV+ ($5 a month) — both of which launch in November — will make Netflix’s $13 a month seem a lot more expensive. As households start sampling Disney+, Apple TV+ and other new services, they may decide to subscribe to Netflix only when there’s a show they want to watch rather than continuing as a subscriber month after month.

Needham analyst Laura Martin has suggested that a streaming price war could cost Netflix upwards of 10 million U.S. subscribers. With 60 million U.S. subscribers, even a 1.5% spike in churn — 900,000 subscribers — is more than the difference between the 500,000 U.S. subscriber gain Netflix had this quarter and the 130,000 decline it had the previous quarter.

Apple TV+, Disney+, HBO Max, and Peacock Are Coming

Speaking of churn, Netflix is about to get four big new competitors. Apple, which is the biggest company in the world, will launch Apple TV+ on Nov. 1. Disney+, which has the biggest film/TV franchises in the world in Marvel, Star Wars and Pixar, will launch Disney+ on November 12. AT&T’s HBO Max and Comcast’s Peacock are both announced to launch in April 2020.

Hastings, who said a few weeks ago that streaming would be “a whole new world starting in November” played down that comment in the earnings interview. “From when we began in streaming, Hulu and YouTube and Amazon Prime in 2007 and 2008 were all in the market,” Hastings said. “All four of us have been competing heavily — including with linear TV — for the last 12 years, so fundamentally there’s not a big change here.”

That’s a howler. The four new streamers coming into the market over the next several months are backed by bigger companies than Netflix with bigger franchises than Netflix and with hit shows like Friends and The Office that are currently on Netflix. We’re in a franchise era where putting Star Wars in a film or TV title cuts through the noise in ways that original stories simply can’t.

Netflix doesn’t have a franchise on the level of Marvel, Pixar, DC Universe, Harry Potter, Fast and Furious, Game of Thrones, etc., with the arguable exception of Stranger Things. I’m bullish on Netflix globally because the company is years ahead of its competitors in many international markets. If franchises become the dominant weapon in the Streaming Wars, though, Netflix will be in serious trouble.

Netflix needs more franchise hits, and those Stranger Things kids aren’t getting any younger.

Scott Porch writes about the TV business for Decider and is a contributing writer for The Daily Beast. You can follow him on Twitter @ScottPorch.