Are We Sure Coronavirus Fears Will Benefit Netflix and Other Streamers?

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“It is important to remember that the overwhelming majority of time spent on these services is ad-lite or ad-free,” media analyst Rich Greenfield says


With the novel coronavirus outbreak spreading throughout the U.S. and the world, inciting fears of contagion, conventional wisdom tells us that more people will choose to stay home — watching Netflix, Disney+, Amazon and other streaming services. That same wisdom suggests the expected increase in streaming hours could be a boon for those streaming platforms; however, it’s a little more complicated than simply: More hours; better business. For a business centered on subscriptions and not advertising, a bump in viewership without also a significant bump in subscribers isn’t going to translate into big dollars. “Netflix charges a fixed price of $9 to $16 per month in the US, regardless of how many hours are watched. We have been arguing that Netflix needs a $5 to $7 a month price subsidized by $5 to $7 per month of ads to compete with new streaming entrants at $5 to $7 a month,” Needham Analyst Laura Martin wrote in a note to investors on Tuesday. “Another strong reason to offer an ad-driven tier is that more viewing hours for any reason would allow Netflix shareholders to participate in revenue upside.” Martin said that given Netflix’s saturation of the U.S. market — with 61 million subscribers representing 75% of streaming homes — means it’s unlikely that the COVID-19 scare will add a significant number of new U.S. subs. “More hours viewed by existing subs are not monetized by Netflix,” she said. Advertising video on demand services like Hulu and NBCUniversal’s forthcoming Peacock service looks mighty good now. Ad-supported streaming, which seemingly is becoming all the rage, gives companies another avenue to make money. Outside the price per month members pay, Netflix makes no additional money no matter how much people watch or binge on the service. And at the moment, the streamer doesn’t really make money either. Netflix declined to comment for this story. In its most recent fourth quarter earnings report, Netflix reported that its free cash flow — the cash left over after paying for the expenses and expenditures to run the business — was negative $1.7 billion and that for the full year it was negative $3.3 billion. The company plans to “improve (free cash flow) each year and to move slowly toward (free cash flow) positive,” with forecasts for 2020 of approximately negative $2.5 billion in free cash flow. The idea that the coronavirus pandemic could mean more money for Netflix — in any significant way — is a non-starter. Subscriber growth in the U.S. has been slowing for years as the service has relied on growth overseas. “Netflix, Amazon and Apple are in a uniquely strong position given their global reach and lack of need/care for the movie exhibition industry,” LightShed media analyst Rich Greenfield wrote in a blogpost to clients late last week. “And, to the extent consumer behavior permanently changes as a result of the pandemic, it could accelerate streaming’s prominence in the film industry.” While changing behaviors related to coronavirus certainly could turn streaming into an even more attractive alternative to going to the movies, or any number of entertainment events, Martin argues that Netflix is a luxury during a time when people around the globe might have to make some tough decisions. “Italy just quarantined its entire country implying millions of travel employees are not going to work or get paid, and travel globally has declined precipitously,” Martin wrote. “Since Netflix is a luxury, we assume international churn will rise and offshore revenue growth will slow until COVID-19 retreats.” Coronavirus fears resulting in self-imposed quarantines and isolation, could benefit the likes of Amazon, which banks its business model on getting members to spend as much time with the service so in hopes that they’ll buy more. “We expect streaming time spent to surge meaningfully with all the major streaming services benefitting,” Greenfield said. “To the extent streaming time benefits in 2020, it is important to remember that the overwhelming majority of time spent on these services is ad-lite or ad-free, which only adds to the challenges facing linear, live TV.”