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• Netflix benefits financially from not being able to produce during contact restrictions
• Netflix may hit a new high in user numbers by the end of the year
• Netflix desperately needs a sustainable revenue generation strategy
It became clear in the second week of November that the approval of a COVID-19 vaccine would harm Netflix: BioNTech / Pfizer had announced that the vaccine they had developed was extremely effective – as a result, the share price of the streaming service fell sharply.
While contact restrictions cannot be produced
However, the company’s value does not decrease because users will stream less post-Corona. After all, subscribers pay a monthly fee that does not depend on the number of films and series streamed. The subscription income is the company’s main source of income and in order to secure this, Netflix has to invest in customer loyalty with new content. In order to be able to keep up with the competition at the same time, the offer has to grow constantly. Ideally, this is exclusive content that is not available to users of other streaming services – that’s why Netflix has been producing itself since 2013, for which the company spent a good 15.3 billion US dollars in 2019. Due to the contact restrictions, there were no in-house productions and accordingly such costs were hardly incurred in 2020: Netflix has more money, the share price rose to a record high in July.
For the streaming service, this means that a positive cash flow was achieved for the first time in the last five years – in the third quarter (Q3) it was even around 1.15 billion US dollars. For comparison: In Q3 2019, cash flow was minus $ 551 million. For the full year 2019, net income was $ 1.9 billion and negative cash flow was a full $ 3.3 billion.
Record number of new Netflix subscribers
Netflix was not only able to benefit from the lack of production costs in the first three quarters of 2020: During the worldwide contact restrictions, the need for entertainment in one’s own four walls has apparently increased sharply – and with it the number of subscribers to streaming services. In Q1 2020, almost 16 million people decided to buy a new Netflix subscription, in Q2 it was around 10 million. In Q3, however, only 2.2 million new users could be acquired, which corresponds to 0.3 million users less than expected. However, Netflix is again forecasting around 6 million new subscribers for Q4 2020 – if this development actually takes place, it would be an all-time high with 34 million new subscribers in 2020 as a whole: The highest number of new users so far was in 2018 with 28.6 million new subscribers reached. According to Statista, there are currently around 195 million paying Netflix customers.
At the same time, Netflix, with an enterprise value of 10.3 billion US dollars, has around 15.5 billion US dollars in long-term debt, which is why a new, sustainable strategy to generate income and increase return on sales (forecast 2020: 18 percent; 2021: 19 percent) is urgent What is necessary: If a COVID-19 vaccine is approved, filming can presumably be resumed soon and the company will have to spend the money saved in recent months, which has benefited the positive cash flow, on customer loyalty.
Netflix ’strategy: capital dilution, less in-house productions or a growth market in Asia?
According to themotleyfool, Netflix has two options for achieving a positive cash flow in the long term: Either capital dilution can be carried out or fewer in-house productions can be realized (which would, however, make competition much more difficult) – neither of the two options is optimal. The streaming service has been trying to solve the problem for several years using the number of users. However, the problem here is that both the American and (as a result of the developments in recent months) the European market are already saturated, i.e. there will no longer be enough new users in these regions.
As a growth market, Netflix is now focusing on the Asian market, where half of all new subscriptions were concluded in Q3 2020. According to CNBC, Tony Zameczkowski, vice president of business development for the Asia-Pacific region, plans to invest “millions of dollars” in original and licensed content in the emerging market. In Q3 2020, revenues of $ 635 million were generated in Asia. Zamesczkowski explains that Japan, India and Indonesia are markets where Netflix definitely sees significant potential for the future.
Olga Rogler / Forex-news.com.net editors
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