Is Netflix the New Lipstick? Subscribers Surge Despite Economic Downturn
Life, at present, is terrifying and oddly mundane. Some of us find comfort in watching the daily press briefings by New York Gov. Andrew Cuomo. Others have Netflix.
Last month, 34.3 million people made a virtual-beeline to watch “Tiger King,” a bizarre seven-part documentary on Netflix about the criminal case against the flamboyant Joe Maldonado-Passage, better known as Joe Exotic. It was the most-watched documentary — so far — of the quarantine era.
No doubt this helped Netflix add 16 million new subscribers to its 167 million base by the end of the first quarter of 2020. The streaming service has more than 180 million subscribers globally. On April 17, the company’s stock price reached a record high of $448, making it more valuable than U.S. oil giant Exxon Mobile at $196 billion.
To be sure, Netflix is benefiting from the pandemic in the short run. But its continued cash burn and expected leveling off or decline in subscribers later this year as the economy re-opens will be its true test.
Is Netflix, the new lipstick? The “lipstick effect,” a theory proposed by Leonard Lauder, the chairman of Estée Lauder Companies, suggests consumers still spend money on small indulgences during economic downturns.
“It’s no surprise that streaming is surging with people being stuck at home,” said Bernie McTernan, a senior analyst at Rosenblatt Securities. “I think bullish investors will say that higher usage means greater pricing power for Netflix. But bearish investors will likely say it’s a tough pill to swallow for customers given how many are out of work.”
In a note, analyst John Blackledge at Cowen & Co. wrote, “We expect a strong quarter driven by a solid slate of originals coupled with a captive audience.”
According to analysts, audiences’ allegiance to Netflix and other new streaming services will grow even more entrenched the longer theaters are closed.
Analysts had projected that investors will be watching Netflix’s subscriber numbers, sure to rise. In a recent research note, Credit Suisse pointed out Netflix’s unique position. The firm broke down how the platform’s wide array of content and high-purchasing power will help keep costs down once production eventually resumes.
Like the rest of Hollywood, Netflix has been forced to shut production in the wake of the coronavirus, offering the platform an unusual opportunity to capitalize on free cash-flow — that is, cash that can be used by the company without any restrictions — as revenue continues to pour in from new subscribers.
Loop Capital analyst Rob Sanderson agreed that Netflix could be close to positive free cash-flow this year due to the massive industry-wide production halts caused by the COVID-19 outbreak. Like other entertainment companies, Netflix doesn’t have to account for its spending until its shows are aired. Since it has a full year of new content, it will have to account for those costs. Still, new production dollars will diminish this year because of the break in new production.
In March, time spent on streaming services accelerated, monthly average spending on streaming services by Americans increased, paid subscribers rose, and analysts echoed that Netflix is well-suited to ride out the pandemic. Its summer slate of shows remains unaffected.
Disney+, a fledgling competitor, rose to 50 million subscribers, proving itself to be a formidable threat as the category continues to expand. Disney must now grapple with huge hits in other businesses as parks and other consumer segments wither amid lockdown restrictions.
A survey conducted by Harris Poll and the Wall Street Journal in the fall found that Americans are willing to subscribe to four video streaming services and spend on average $44 per month on them. In March, “Americans spent an average of $37 a month on streaming services, up from $30 in November,” the Wall Street Journal reported on November 9. Perhaps the U.S. market is nearing saturation. Future growth by one streaming company may come at the expense of another.
Because of the pandemic, streaming has surged, according to Wurl Inc., a company that delivers video and advertising to connected TVs. The amount of viewing time spiked by more than 20 percent worldwide, exceeding 40 percent in Austria and Spain.
Disney also has another possible thread to pull: animation titles like Soul, Bob’s Burger and Ron’s Gone Wrong.
“Unlike live action productions, animated movies and series are mostly made on computers. As a result, animation studios at big companies like Disney are able to continue work on many projects. And that is creating an opportunity for animation,” noted an industry blog on digital media.
Another competitor, Apple, which has sought to increase its presence in video streaming, could use some of its $200 billion in cash to buy available programming — including any unreleased movies Hollywood studios might be inclined to sell. None of its rivals, with the exception of Amazon and possibly Netflix, have such resources at hand.
For now, it looks like a Netflix recession. The question is how the company can bolster its financial position and more permanently stop its cash drain as the worldwide economy reopens and people get off their sofas and out of their homes.
Vidhi Choudhary is a member of the M.A. Class of 2020 at Columbia University’s Graduate School of Journalism
